Is the recent market performance of Appen Limited (ASX: APX) influenced by its fundamentals in any way?

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Most readers already know that Appen (ASX: APX) stock has risen significantly by 13% over the past month. As most know, fundamentals generally 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 be paying close attention to Appen’s ROE today.

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

See our latest review for Appen

How do you calculate return on equity?

The formula for ROE is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Appen is:

8.0% = US $ 30 million ÷ US $ 373 million (based on the last twelve months to June 2021).

The “return” is the amount earned after tax over the past twelve months. Another way to look at this is that for every A $ 1 worth of equity, the company was able to make A $ 0.08 in profit.

What is the relationship between ROE and profit growth?

We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. 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.

A side-by-side comparison of Appen’s 8.0% profit growth and ROE

At first glance, Appen’s ROE isn’t much to say. Still, further study shows that the company’s ROE is similar to the industry average of 8.0%. In particular, the exceptional 29% net profit growth recorded by Appen over the past five years is quite remarkable. Given the slightly low ROE, it is likely that other aspects are behind this growth. For example, the business has a low payout ratio or is managed efficiently.

Next, comparing with the industry net income growth, we found that Appen’s growth is quite high compared to the industry average growth of 14% over the same period, which is great to see.

past profit growth

Profit growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. What is APX worth today? The intrinsic value infographic in our free research report helps to visualize whether APX is currently being poorly valued by the market.

Is Appen Efficiently Reinvesting Its Profits?

Appen has a very low three-year median payout rate of 24%, which means he has the remaining 76% to reinvest in his business. So it appears that Appen is reinvesting its profits massively to grow its business, which is reflected in its profit growth.

In addition, Appen is committed to continuing to share its profits with its shareholders, which we can deduce from its long history of six years of paying dividends. After studying the latest consensus data from analysts, we found that the company is expected to continue to pay out around 24% of its profits over the next three years. Still, forecasts suggest that Appen’s future ROE will reach 11% even though the company’s payout ratio isn’t expected to change much.

Conclusion

All in all, it seems that Appen has some positive aspects for its business. Despite its low rate of return, the fact that the company reinvested a very large portion of its profits in its business undoubtedly contributed to the strong growth in profits. That said, the company’s earnings growth is expected to slow, as current analyst estimates predict. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.

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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