Yahoo Finance Are Robust Financials Driving The Recent Rally In Academies Australasia Group Limited's (ASX:AKG) Stock?
Academies Australasia Group's (ASX:AKG) stock is up by a considerable 30% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Academies Australasia Group's ROE.
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 Academies Australasia Group
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 Academies Australasia Group is:
12% = AU$4.0m ÷ AU$34m (Based on the trailing twelve months to June 2020).
The 'return' is the yearly profit. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.12 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Academies Australasia Group's Earnings Growth And 12% ROE
To start with, Academies Australasia Group's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 9.1%. Probably as a result of this, Academies Australasia Group was able to see an impressive net income growth of 51% over the last five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
Next, on comparing with the industry net income growth, we found that Academies Australasia Group's growth is quite high when compared to the industry average growth of 18% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Academies Australasia Group fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Academies Australasia Group Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 78% (implying that it keeps only 22% of profits) for Academies Australasia Group suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.
Besides, Academies Australasia Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.
Summary
On the whole, we feel that Academies Australasia Group's performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Up till now, we've only made a short study of the company's growth data. You can do your own research on Academies Australasia Group and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.
This article by Simply Wall St is general in nature. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
