It's hard to get excited about Elders (ASX:ELD)'s recent performance, with its share price down 4.7% over the past month. However, a closer look at the company's healthy financials might make you think again. The company is worth keeping an eye on, given that fundamentals usually drive long-term market outcomes. In particular, I would like to pay attention to Elders' ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder as it indicates how effectively their capital is being reinvested. More simply, it measures a company's profitability in relation to shareholder equity.
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How do you calculate return on equity?
Return on equity can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, Elder's ROE is:
12% = AUD 106 million ÷ AUD 867 million (based on the trailing twelve months to September 2023).
“Revenue” is the income a company has earned over the past year. Another way to think of it is that for every A$1 worth of shares, the company was able to earn him A$0.12 in profit.
Why is ROE important for profit growth?
It has already been established that ROE serves as an indicator of how efficiently a company will generate future profits. Now we need to evaluate how much profit the company reinvests or “retains” for future growth, which gives us an idea about the company's growth potential. Generally speaking, other things being equal, companies with high return on equity and profit retention will have higher growth rates than companies without these attributes.
Elders' earnings growth and ROE 12%
First of all, Elders' ROE looks acceptable. Also, when we compare with the industry, we find that the industry average ROE is almost similar at 11% for him. As a result, this is considered by the elders to have laid the foundation for his decent growth of 12% over the past five years.
We then compared Elders' net income growth rate with the industry and found that the company's growth rate is lower than the industry average growth rate of 16% over the same five-year period, which is a bit concerning.
Earnings growth is a big factor in stock valuation. The next thing investors need to determine is whether the expected earnings growth is already built into the stock price, or the lack thereof. Doing so will help you determine whether a stock's future is promising or ominous. Is the market pricing in the future outlook for ELDs? Find out in our latest Intrinsic Value infographic research report.
Are elders reinvesting profits effectively?
The median three-year dividend payout ratio is 45% (meaning the company retains 55% of its profits), so Elders has seen a fair amount of growth in its earnings, making it well covered. It appears that they are reinvesting efficiently by paying dividends. .
Additionally, Elders has been paying dividends for six years. This shows that the company is committed to sharing profits with shareholders. According to our latest analyst data, the company's future dividend payout ratio is expected to rise to 59% over the next three years. In any case, despite the higher expected dividend payout ratio, ROE is not expected to change significantly.
conclusion
Overall, we are very satisfied with Elders' performance. In particular, it's great to see that the company has invested heavily in its business, delivering strong revenue growth, along with high rates of return. Having said that, a review of the latest analyst forecasts indicates that the company's future revenue growth is expected to slow. Learn more about the company's future revenue growth forecasts here. free Create a report on analyst forecasts to learn more about the company.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
