Yahoo Finance Arcontech Group plc (LON:ARC) On An Uptrend: Could Fundamentals Be Driving The Stock?
Most readers would already know that Arcontech Group's (LON:ARC) stock increased by 2.6% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Arcontech Group's ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Arcontech Group
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Arcontech Group is:
8.8% = UK£611k ÷ UK£7.0m (Based on the trailing twelve months to June 2022).
The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.09 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. 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 Arcontech Group's Earnings Growth And 8.8% ROE
When you first look at it, Arcontech Group's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.8%. Even so, Arcontech Group has shown a fairly decent growth in its net income which grew at a rate of 7.3%. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared Arcontech Group's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 13% in the same period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Arcontech Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Arcontech Group Making Efficient Use Of Its Profits?
With a three-year median payout ratio of 28% (implying that the company retains 72% of its profits), it seems that Arcontech Group is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.
Additionally, Arcontech Group has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 75% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.
Conclusion
In total, it does look like Arcontech Group has some positive aspects to its business. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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.
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