With its stock down 5.3% over the past month, it is easy to disregard Allied Farmers (NZSE:ALF). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Allied Farmers’ ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Allied Farmers
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 Allied Farmers is:
23% = NZ$4.2m ÷ NZ$18m (Based on the trailing twelve months to December 2022).
The ‘return’ refers to a company’s earnings over the last year. So, this means that for every NZ$1 of its shareholder’s investments, the company generates a profit of NZ$0.23.
Why Is ROE Important For Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. 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.
Allied Farmers’ Earnings Growth And 23% ROE
Firstly, we acknowledge that Allied Farmers has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 9.1% also doesn’t go unnoticed by us. This probably laid the groundwork for Allied Farmers’ moderate 18% net income growth seen over the past five years.
When you consider the fact that the industry earnings have shrunk at a rate of 5.2% in the same period, the company’s net income growth is pretty remarkable.
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. Doing so will help them establish if the stock’s future looks promising or ominous. Is Allied Farmers fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Allied Farmers Efficiently Re-investing Its Profits?
While the company did pay out a portion of its dividend in the past, it currently doesn’t pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.
On the whole, we feel that Allied Farmers’ performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard will have the 1 risk we have identified for Allied Farmers.
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