It’s hard to get excited after watching the recent performance of Acerinox (BME:ACX), as its stock is down 15% in the past three months. But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In particular, we will be paying attention to Acerinox’s ROE today.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
See our latest review for Acerinox
How is ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Acerinox is:
26% = €586 million ÷ €2.2 billion (based on the last twelve months until December 2021).
“Yield” refers to a company’s earnings over the past year. This therefore means that for each €1 of investment by its shareholder, the company generates a profit of €0.26.
What is the relationship between ROE and earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
Acerinox earnings growth and ROE of 26%
First of all, we love that Acerinox has an impressive ROE. Additionally, the company’s ROE is above the industry average of 15%, which is quite remarkable. Despite this, Acerinox’s five-year net income growth has remained fairly stable over the past five years. So, there could be other aspects that could potentially impede the growth of the business. These include low revenue retention or poor capital allocation
We then compared Acerinox’s net income growth with the industry and found that the company’s growth figure is lower than the industry average growth rate of 17% over the same period, which which is a little worrying.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. Has the market priced in ACX’s future prospects? You can find out in our latest infographic research report on intrinsic value.
Does Acerinox effectively use its retained earnings?
With a high three-year median payout ratio of 58% (implying that the company retains only 42% of its revenue) from its business to reinvest in its business), most of Acerinox’s profits are returned to shareholders. , which explains the lack of earnings growth.
Furthermore, Acerinox has paid dividends over a period of at least ten years, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of business growth. . After reviewing the latest analyst consensus data, we found that the company’s future payout ratio is expected to drop to 36% over the next three years. Either way, Acerinox’s future ROE is expected to drop to 13% despite the anticipated lower payout ratio. We believe there could likely be other factors that could be driving the company’s projected decline in ROE.
All in all, we think Acerinox certainly has positive factors to consider. Still, the weak earnings growth is a bit of a concern, especially since the company has a high rate of return. Investors could have benefited from the high ROE had the company reinvested more of its earnings. As mentioned earlier, the company retains a small portion of its profits. That said, in studying the latest analyst forecasts, we found that while the company has seen growth in past earnings, analysts expect future earnings to decline. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.