Most readers will already know that the ARB (ASX:ARB) share price has increased by a significant 18% over the past three months. Since the market usually pays for a company's long-term fundamentals, we decided to investigate whether a company's key performance indicators are influencing the market. Specifically, we decided to examine ARB'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. More simply, it measures a company's profitability in relation to shareholder equity.
Check out our latest analysis for ARB.
How do I 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, ARB's ROE is:
15% = AUD 92 million ÷ AUD 636 million (based on the trailing twelve months to December 2023).
“Revenue” is the income a company has earned over the past year. This means that for every A$1 a shareholder invests, the company will generate a profit of A$0.15 for him.
What is the relationship between ROE and profit growth rate?
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 speaking, other things being equal, companies with high return on equity and profit retention will have higher growth rates than companies without these attributes.
A side-by-side comparison of ARB's earnings growth and ROE of 15%.
At first glance, ARB appears to have a decent ROE. Additionally, his ROE for the company is very good compared to the industry average of his 12%. Perhaps as a result of this, ARB has been able to grow by a respectable 14% over the past five years.
As a next step, we compared ARB's net income growth rate with the industry and found that the company has a similar growth rate when compared to the industry average growth rate of 13% over the same period.
Earnings growth is an important metric to consider when evaluating a stock. In any case, investors should seek to ascertain whether expected earnings growth or decline has been factored in. Doing so will help you determine whether a stock's future is promising or ominous. One good indicator of expected earnings growth is the P/E ratio, which determines the price the market is willing to pay for a stock based on its earnings outlook. So you might want to check whether ARB is trading on a higher or lower P/E relative to its industry.
Is ARB using profits efficiently?
With a three-year median payout ratio of 50% (meaning the company retains 50% of its profits), ARB has seen considerable growth in earnings and a well-covered dividend. It seems like they are efficiently reinvesting their money in the form of payments. .
Furthermore, ARB is determined to continue sharing its profits with its shareholders, as inferred by its long history of paying dividends for at least 10 years. Based on our latest analyst data, the company's future payout ratio over the next three years is expected to be around 55%. Therefore, the company's future ROE is not expected to change much, with analysts forecasting it to be 17%.
summary
Overall, I'm very satisfied with ARB's 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. That said, the company's revenue growth is expected to slow, according to the latest industry analyst forecasts. 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 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.
