Yahoo Finance Is Weakness In Australian Clinical Labs Limited (ASX:ACL) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?
Australian Clinical Labs (ASX:ACL) has had a rough week with its share price down 4.2%. 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 Australian Clinical Labs' ROE in this article.
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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Australian Clinical Labs
How Do You 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 Clinical Labs is:
64% = AU$134m ÷ AU$208m (Based on the trailing twelve months to December 2021).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.64 in profit.
What Is The Relationship Between ROE And 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 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 64% ROE
To begin with, Australian Clinical Labs has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 8.1% the company's ROE is quite impressive. As a result, Australian Clinical Labs' exceptional 53% net income growth seen over the past five years, doesn't come as a surprise.
Given that the industry shrunk its earnings at a rate of 2.0% in the same period, the net income growth of the company is quite impressive.
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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Efficiently Re-investing Its Profits?
The three-year median payout ratio for Australian Clinical Labs is 36%, which is moderately low. The company is retaining the remaining 64%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Australian Clinical Labs is reinvesting its earnings efficiently.
Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 64% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 20% over the same period.
Summary
On the whole, we feel that Australian Clinical Labs' performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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.
