Allied Digital Services (NSE: ADSL) shares are up 83% in the past three months. As most know, fundamentals typically guide long-term market price movements, so we decided to look at the company’s key financial metrics today to see if they have a role to play in the recent one. price movement. In particular, we will pay particular attention to the ROE of Allied Digital Services today.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess a company’s profitability against its equity.
Check out our latest review for Allied Digital Services
How is the ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for Allied Digital Services is:
9.3% = â¹ 483m Ã· â¹ 5.2b (Based on the last twelve months up to September 2021).
The “return” is the annual profit. Another way to look at this is that for every 1 value of equity, the company was able to make 0.09 profit.
What is the relationship between ROE and profit growth?
So far we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess how much profit the company is reinvesting or “holding back” for future growth, which then gives us an idea of ââthe growth potential of the company. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
Allied Digital Services profit growth and 9.3% ROE
At first glance, Allied Digital Services’ ROE does not look very promising. Then, compared to the industry average ROE of 14%, the company’s ROE leaves us even less enthusiastic. Despite this, Allied Digital Services has been able to significantly increase its bottom line, at a rate of 47% over the past five years. Therefore, there could be other reasons behind this growth. Such as – high profit retention or effective management in place.
Then, comparing with the growth in net income of the industry, we found that the growth of Allied Digital Services is quite high compared to the industry average growth of 12% during the same period, this which is great to see.
Profit growth is an important metric to consider when valuing a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or worrisome. Is Allied Digital Services just valued over other companies? These 3 evaluation measures could help you decide.
Are Allied Digital Services Using Profits Efficiently?
Allied Digital Services has a very low three-year median payout rate of 15%, which means it has 85% left to reinvest in its business. This suggests that management is reinvesting most of the profits to grow the business, as evidenced by the growth seen by the business.
In addition, Allied Digital Services has paid dividends over a period of at least ten years, which means the company is very serious about sharing its profits with its shareholders.
Overall, we think Allied Digital Services definitely has some positive factors to consider. Despite its low rate of return, the fact that the company reinvested a very large portion of its profits back into its business undoubtedly contributed to the strong profit growth. While we don’t completely reject the business, what we would do is try to determine how risky the business is in order to make a more informed decision about the business. To learn about the 4 risks we have identified for Allied Digital Services, visit our free risk dashboard.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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