Yahoo Finance Do Its Financials Have Any Role To Play In Driving Australian Clinical Labs Limited's (ASX:ACL) Stock Up Recently?
Australian Clinical Labs (ASX:ACL) has had a great run on the share market with its stock up by a significant 30% over the last three months. 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. In this article, we decided to focus on Australian Clinical Labs' ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Check out our latest analysis for Australian Clinical Labs
How To Calculate Return On Equity?
Return on equity 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 Australian Clinical Labs is:
9.5% = AU$16m ÷ AU$165m (Based on the trailing twelve months to December 2023).
The 'return' is the profit over the last twelve months. That means that for every A$1 worth of shareholders' equity, the company generated A$0.09 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Australian Clinical Labs' Earnings Growth And 9.5% ROE
When you first look at it, Australian Clinical Labs' ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 6.7% doesn't go unnoticed by us. Yet, Australian Clinical Labs has posted measly growth of 3.2% over the past five years. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Therefore, the low growth in earnings could also be the result of this.
Next, on comparing with the industry net income growth, we found that the growth figure reported by Australian Clinical Labs compares quite favourably to the industry average, which shows a decline of 6.7% over the last few years.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Australian Clinical Labs''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Australian Clinical Labs Using Its Retained Earnings Effectively?
With a high three-year median payout ratio of 60% (or a retention ratio of 40%), most of Australian Clinical Labs' profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.
Moreover, Australian Clinical Labs has been paying dividends for three years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 62%. However, Australian Clinical Labs' ROE is predicted to rise to 22% despite there being no anticipated change in its payout ratio.
Summary
On the whole, we do feel that Australian Clinical Labs has some positive attributes. Especially the substantial growth in earnings backed by a decent ROE. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.
