The Aorema Communications (LON:AEO) share price has increased by a significant 31% over the past three months. Considering the company's impressive performance, we decided to take a closer look at its financial metrics, as a company's financial health over the long term usually drives market results. Specifically, we decided to examine Aeorema Communications's ROE in this article.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it receives from its shareholders. In other words, ROE shows the return that each dollar of a shareholder's investment generates.
Check out our latest analysis for Aeorema Communications.
How is ROE calculated?
ROE can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, Aeorema Communications' ROE is:
27% = GBP 757,000 ÷ GBP 2.8 million (Based on the trailing twelve months to June 2023).
“Return” refers to a company's earnings over the past year. One way he conceptualizes this is that for every £1 of shareholders' equity, the company made his £0.27 in profit.
What relationship does ROE have with profit growth?
So far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits a company reinvests or “retains”, and how effectively it does so, we are then able to assess a company's earnings growth potential. Generally, other things being equal, companies with high return on equity and profit retention will have higher growth rates than companies without these attributes.
Aeorema Communications' revenue growth and ROE 27%
First of all, we like that Aeorema Communications has a good ROE. Secondly, we can't ignore the comparison to the average ROE of 19% reported by the industry. Under these circumstances, Aeorema Communications' five-year net income was expected to increase by a significant 37%.
We then compared Aeorema Communications's net income growth rate to its industry. The same he found that the company's growth rate was high when compared to the industry where in five years he recorded a growth rate of 18%.
Earnings growth is an important metric to consider when evaluating a stock. It's important for investors to know whether the market is pricing in a company's expected earnings growth (or decline). This can help you decide whether to position the stock for a bright or bleak future. Is Aeorema Communications fairly valued compared to other companies? These 3 valuation metrics may help you decide.
Is Aeorema Communications effectively utilizing its retained earnings?
Aeorema Communications' median three-year payout ratio is 29%, which is rather low. The company will hold the remaining 71%. This suggests that the company's dividend is well covered, and given the high growth discussed above, Aeorema Communications appears to be reinvesting its earnings efficiently.
Furthermore, Eorema Communications is determined to continue sharing its profits with shareholders, as inferred by its long history of paying dividends for at least 10 years.
conclusion
Overall, I'm very satisfied with Aeorema Communications' performance. In particular, we like that the company is reinvesting heavily in its business and has a high rate of return. Unsurprisingly, this led to impressive revenue growth. If the company continues to grow its revenue as it has, this could have a positive impact on the stock price, given how earnings per share affect the stock price over the long term. Remember that the price of a stock also depends on its perceived risk. Therefore, investors should always be informed about the risks involved before investing in a company. To learn about the two risks he has identified for Aeorema Communications, visit our risks dashboard for free.
Have feedback on this article? Interested in its content? contact Please contact us directly. Alternatively, email our 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 using only unbiased methodologies, 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.
