Is Weakness In Allgeier SE (ETR:AEIN) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

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It is hard to get excited after looking at Allgeier’s (ETR:AEIN) recent performance, when its stock has declined 7.8% over the past month. 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. In this article, we decided to focus on Allgeier’s ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Put another way, it reveals the company’s success at turning shareholder investments into profits.

Check out our latest analysis for Allgeier

How Is ROE Calculated?

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 Allgeier is:

9.0% = €17m ÷ €189m (Based on the trailing twelve months to December 2023).

The ‘return’ is the amount earned after tax over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.09 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Allgeier’s Earnings Growth And 9.0% ROE

To start with, Allgeier’s ROE looks acceptable. Be that as it may, the company’s ROE is still quite lower than the industry average of 13%. That being the case, the significant five-year 52% net income growth reported by Allgeier comes as a pleasant surprise. Therefore, there could be other causes behind this growth. Such as – high earnings retention or an efficient management in place. Bear in mind, the company does have a respectable ROE. It is just that the industry ROE is higher. So this certainly also provides some context to the high earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that Allgeier’s growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.

past-earnings-growth

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is AEIN fairly valued? This infographic on the company’s intrinsic value has everything you need to know.

Is Allgeier Making Efficient Use Of Its Profits?

Allgeier has a three-year median payout ratio of 46% (where it is retaining 54% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Allgeier is reinvesting its earnings efficiently.

Additionally, Allgeier has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to drop to 27% over the next three years. The fact that the company’s ROE is expected to rise to 17% over the same period is explained by the drop in the payout ratio.

Conclusion

Overall, we are quite pleased with Allgeier’s performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.