Yahoo Finance Is Weakness In Alamo Group Inc. (NYSE:ALG) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?
With its stock down 18% over the past three months, it is easy to disregard Alamo Group (NYSE:ALG). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Alamo Group's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. 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 Alamo Group
How Do You 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 Alamo Group is:
14% = US$135m ÷ US$957m (Based on the trailing twelve months to March 2024).
The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.14 in profit.
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. 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.
A Side By Side comparison of Alamo Group's Earnings Growth And 14% ROE
To start with, Alamo Group's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 14%. This probably goes some way in explaining Alamo Group's moderate 18% growth over the past five years amongst other factors.
Next, on comparing with the industry net income growth, we found that Alamo Group's growth is quite high when compared to the industry average growth of 8.9% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is ALG fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Alamo Group Using Its Retained Earnings Effectively?
In Alamo Group's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 8.4% (or a retention ratio of 92%), which suggests that the company is investing most of its profits to grow its business.
Additionally, Alamo Group 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.
Conclusion
On the whole, we feel that Alamo Group's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
