Algonquin Power & Utilities Corp. (TSE:AQN) Stocks have fallen but fundamentals look good: will the market correct the stock price going forward?

It’s hard to get excited after looking at the recent performance of Algonquin Power & Utilities (TSE:AQN), as its stock is down 12% in the past three months. But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. Specifically, we decided to study the ROE of Algonquin Power & Utilities in this article.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

Check out our latest analysis for Algonquin Power & Utilities

How is ROE calculated?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, according to the formula above, the ROE for Algonquin Power & Utilities is:

3.2% = $242 million ÷ $7.6 billion (based on trailing 12 months to March 2022).

“Yield” refers to a company’s earnings over the past year. This therefore means that for every C$1 of investment by its shareholder, the company generates a profit of C$0.03.

What does ROE have to do with earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

Algonquin Power & Utilities Earnings Growth and ROE of 3.2%

It’s pretty clear that Algonquin Power & Utilities’ ROE is pretty weak. Not only that, even compared to the industry average of 8.7%, the company’s ROE is quite unremarkable. Despite this, surprisingly, Algonquin Power & Utilities has experienced exceptional net income growth of 36% over the past five years. We believe there could be other factors at play here. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.

Then, comparing with industry net income growth, we found that Algonquin Power & Utilities’ growth is quite high compared to the industry average growth of 0.6% over the same period, which is great to see.

TSX: AQN Prior Earnings Growth June 18, 2022

Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. Has the market priced in AQN’s future prospects? You can find out in our latest infographic research report on intrinsic value.

Is Algonquin Power & Utilities making effective use of its profits?

Algonquin Power & Utilities has a large three-year median payout ratio of 60%, which means the company retains only 40% of its revenue. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Additionally, Algonquin Power & Utilities is committed to continuing to share its earnings with shareholders, which we infer from its long history of paying dividends for at least ten years. Looking at current analyst consensus data, we can see that the company’s future payout ratio is expected to reach 90% over the next three years. However, Algonquin Power & Utilities’ future ROE is expected to increase to 9.0% despite the company’s expected increase in payout ratio. We infer that there could be other factors that could be driving the company’s anticipated ROE growth.

Summary

Overall, we believe Algonquin Power & Utilities certainly has positive factors to consider. That is, quite impressive revenue growth. However, low earnings retention means the company’s earnings growth could have been higher had it reinvested more of its earnings. That said, a study of the latest analyst forecasts shows that the company should see a slowdown in future earnings growth. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

About Ian Crawford

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