Yahoo Finance Apiam Animal Health Limited (ASX:AHX) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?
It is hard to get excited after looking at Apiam Animal Health's (ASX:AHX) recent performance, when its stock has declined 11% over the past three months. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Apiam Animal Health's ROE in this article.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Apiam Animal Health
How Do You Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Apiam Animal Health is:
4.8% = AU$4.2m ÷ AU$86m (Based on the trailing twelve months to December 2021).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.05.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
A Side By Side comparison of Apiam Animal Health's Earnings Growth And 4.8% ROE
On the face of it, Apiam Animal Health's ROE is not much to talk about. Next, when compared to the average industry ROE of 8.2%, the company's ROE leaves us feeling even less enthusiastic. Hence, the flat earnings seen by Apiam Animal Health over the past five years could probably be the result of it having a lower ROE.
We then compared Apiam Animal Health's net income growth with the industry and found that the industry which has shrunk at a rate of 0.1% in the same period, which makes the company's growth somewhat better.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Apiam Animal Health is trading on a high P/E or a low P/E, relative to its industry.
Is Apiam Animal Health Efficiently Re-investing Its Profits?
With a high three-year median payout ratio of 55% (implying that the company keeps only 45% of its income) of its business to reinvest into its business), most of Apiam Animal Health's profits are being paid to shareholders, which explains the absence of growth in earnings.
In addition, Apiam Animal Health has been paying dividends over a period of five years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 47%. Regardless, the future ROE for Apiam Animal Health is predicted to rise to 9.4% despite there being not much change expected in its payout ratio.
Summary
In total, it does look like Apiam Animal Health has some positive aspects to its business. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here
