Yahoo Finance Australian Agricultural Projects Ltd's (ASX:AAP) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?
Australian Agricultural Projects' (ASX:AAP) stock is up by a considerable 32% over the past week. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Australian Agricultural Projects' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Australian Agricultural Projects
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Australian Agricultural Projects is:
13% = AU$978k ÷ AU$7.5m (Based on the trailing twelve months to June 2021).
The 'return' is the yearly profit. That means that for every A$1 worth of shareholders' equity, the company generated A$0.13 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Australian Agricultural Projects' Earnings Growth And 13% ROE
To start with, Australian Agricultural Projects' ROE looks acceptable. On comparing with the average industry ROE of 7.9% the company's ROE looks pretty remarkable. Needless to say, we are quite surprised to see that Australian Agricultural Projects' net income shrunk at a rate of 35% over the past five years. We reckon that there could be some other factors at play here that are preventing the company's growth. These include low earnings retention or poor allocation of capital.
However, when we compared Australian Agricultural Projects' growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 0.7% in the same period. This is quite worrisome.
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). This then helps them determine if the stock is placed for a bright or bleak future. Is Australian Agricultural Projects fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Australian Agricultural Projects Efficiently Re-investing Its Profits?
Australian Agricultural Projects doesn't pay any dividend, meaning that the company is keeping all of its profits, which makes us wonder why it is retaining its earnings if it can't use them to grow its business. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Summary
In total, it does look like Australian Agricultural Projects has some positive aspects to its business. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 5 risks we have identified for Australian Agricultural Projects by visiting our risks dashboard for free on our platform here.
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.
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