Will Weakness in Alimentation Couche-Tard Inc.'s (TSE:ATD) Stock Prove Temporary Given Strong Fundamentals?

editorial-team@simplywallst.com (Simply Wall St)

Thu, May 22, 2025, 11:26 AM 4 min read

With its stock down 4.8% over the past month, it is easy to disregard Alimentation Couche-Tard (TSE:ATD). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Alimentation Couche-Tard's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Alimentation Couche-Tard is:

18% = US$2.6b ÷ US$14b (Based on the trailing twelve months to February 2025).

The 'return' is the income the business earned over the last year. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.18.

Check out our latest analysis for Alimentation Couche-Tard

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Alimentation Couche-Tard's Earnings Growth And 18% ROE

To start with, Alimentation Couche-Tard's ROE looks acceptable. Even when compared to the industry average of 16% the company's ROE looks quite decent. Alimentation Couche-Tard's decent returns aren't reflected in Alimentation Couche-Tard'smediocre five year net income growth average of 2.7%. So, there could be some other factors at play that could be impacting the company's growth. For instance, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared Alimentation Couche-Tard's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 3.1% in the same period.

past-earnings-growth — TSX:ATD Past Earnings Growth May 22nd 2025

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is ATD fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Alimentation Couche-Tard Using Its Retained Earnings Effectively?

Alimentation Couche-Tard has a low three-year median payout ratio of 14% (meaning, the company keeps the remaining 86% of profits) which means that the company is retaining more of its earnings. However, the low earnings growth number doesn't reflect this as high growth usually follows high profit retention. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, Alimentation Couche-Tard has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 18% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Summary

Overall, we are quite pleased with Alimentation Couche-Tard's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a respectable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.