Yahoo Finance APG|SGA SA's (VTX:APGN) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?
APG|SGA (VTX:APGN) has had a great run on the share market with its stock up by a significant 15% over the last month. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to APG|SGA's ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for APG|SGA
How Do You Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for APG|SGA is:
26% = CHF23m ÷ CHF91m (Based on the trailing twelve months to December 2022).
The 'return' is the amount earned after tax over the last twelve months. That means that for every CHF1 worth of shareholders' equity, the company generated CHF0.26 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
A Side By Side comparison of APG|SGA's Earnings Growth And 26% ROE
First thing first, we like that APG|SGA has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 9.6% which is quite remarkable. Needless to say, we are quite surprised to see that APG|SGA's net income shrunk at a rate of 26% over the past five years. We reckon that there could be some other factors at play here that are preventing the company's growth. These include low earnings retention or poor allocation of capital.
However, when we compared APG|SGA's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 8.7% in the same period. This is quite worrisome.
Earnings growth is an important metric to consider when valuing a stock. 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. What is APGN worth today? The intrinsic value infographic in our free research report helps visualize whether APGN is currently mispriced by the market.
Is APG|SGA Efficiently Re-investing Its Profits?
APG|SGA's high three-year median payout ratio of 150% suggests that the company is depleting its resources to keep up its dividend payments, and this shows in its shrinking earnings. Paying a dividend higher than reported profits is not a sustainable move. You can see the 3 risks we have identified for APG|SGA by visiting our risks dashboard for free on our platform here.
In addition, APG|SGA has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 103% over the next three years. As a result, the expected drop in APG|SGA's payout ratio explains the anticipated rise in the company's future ROE to 42%, over the same period.
Summary
Overall, we have mixed feelings about APG|SGA. While the company does have a high rate of return, its low earnings retention is probably what's hampering its earnings growth. Up till now, we've only made a short study of the company's growth data. You can do your own research on APG|SGA and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.
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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.
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