With its stock down 12% over the past week, it’s easy to overlook Alcoa (NYSE: AA). But if you pay close attention to it, you might find that its key financial metrics look pretty decent, which could mean the stock could potentially rise in the long term given how markets typically reward long-term fundamentals. more resistant term. In this article, we have decided to focus on Alcoa’s ROE.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In simpler terms, it measures a company’s profitability relative to equity.
See our latest analysis for Alcoa
How to calculate return on equity?
the formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, Alcoa’s ROE is:
10% = US $ 566 million ÷ US $ 5.4 billion (based on the last twelve months to June 2021).
The “return” is the income the business has earned over the past year. Another way of thinking is that for every dollar of equity, the company was able to make $ 0.10 in profit.
What is the relationship between ROE and profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. We now need to assess the profits that the business is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the business. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
Alcoa profit growth and 10% ROE
For starters, Alcoa’s ROE seems acceptable. Even so, compared to the industry average ROE of 15%, we’re not very excited. Upon further research, we found that Alcoa’s 4.1% net income growth over the past five years is quite low. Remember, the business has a decent ROE to start with, just that it’s below the industry average. So there may be other reasons why earnings growth is weak. For example, the company pays out a large portion of its profits as dividends or faces competitive pressures.
Then, comparing with the industry’s net income growth, we found that Alcoa’s reported growth was lower than the industry’s growth by 14% over the same period, which is not something we love to see.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This will help them determine whether the future of the stock looks bright or threatening. Is Alcoa fair compared to other companies? These 3 evaluation measures could help you decide.
Is Alcoa effectively reinvesting its profits?
Overall, we think Alcoa has some positive attributes. However, although the company has a decent ROE and high profit retention, its profit growth figure is quite disappointing. This suggests that there could be an external threat to the business, hampering growth. That said, studying the latest analysts’ forecast, we found that while the company has seen past earnings growth, analysts expect future earnings to decline. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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