Yahoo Finance Will Weakness in Air Products and Chemicals, Inc.'s (NYSE:APD) Stock Prove Temporary Given Strong Fundamentals?
With its stock down 12% over the past three months, it is easy to disregard Air Products and Chemicals (NYSE:APD). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Air Products and Chemicals' ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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 Air Products and Chemicals
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Air Products and Chemicals is:
16% = US$2.3b ÷ US$15b (Based on the trailing twelve months to December 2022).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.16.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 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.
Air Products and Chemicals' Earnings Growth And 16% ROE
To begin with, Air Products and Chemicals seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 16%. This certainly adds some context to Air Products and Chemicals' moderate 11% net income growth seen over the past five years.
Next, on comparing Air Products and Chemicals' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 13% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 Air Products and Chemicals is trading on a high P/E or a low P/E, relative to its industry.
Is Air Products and Chemicals Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 63% (or a retention ratio of 37%) for Air Products and Chemicals suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Additionally, Air Products and Chemicals has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 53%. However, Air Products and Chemicals' ROE is predicted to rise to 20% despite there being no anticipated change in its payout ratio.
Summary
In total, we are pretty happy with Air Products and Chemicals' performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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
