Does the recent performance of Ansell Limited (ASX:ANN) stock reflect its financial health?

Most readers will already know that shares of Ansell (ASX:ANN) are up 7.3% over the past three months. Given its impressive performance, we decided to study the company’s key financial indicators, as a company’s long-term fundamentals usually dictate market outcomes. In particular, we’ll be paying attention to Ansell’s ROE today.

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 other words, it reveals the company’s success in turning shareholders’ investments into profits.

Discover our latest analysis for Ansell

How is ROE calculated?

ROE can be calculated using the formula:

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

So, based on the formula above, the ROE for Ansell is:

14% = $219 million ÷ $1.5 billion (based on trailing 12 months to December 2021).

“Yield” is the income the business has earned over the past year. This therefore means that for every A$1 of investment by its shareholder, the company generates a profit of A$0.14.

What is the relationship between ROE and earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. 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 all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

Ansell earnings growth and ROE of 14%

At first glance, Ansell appears to have a decent ROE. Especially when compared to the industry average of 11%, the company’s ROE looks pretty impressive. Probably thanks to this, Ansell was able to register a decent growth of 16% over the past five years.

Then, comparing with industry net income growth, we found that Ansell’s growth is quite high compared to the average industry growth of 7.5% over the same period, which which is great to see.

ASX: ANN Past Earnings Growth May 31, 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 assessed the future prospects for ANN? You can find out in our latest infographic research report on intrinsic value.

Is Ansell using its retained earnings effectively?

Ansell has a healthy combination of a moderate three-year median payout ratio of 42% (or a retention rate of 58%) and respectable earnings growth, as we saw above, which means that the company has made effective use of its profits.

In addition, Ansell has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 43%. Still, forecasts suggest Ansell’s future ROE will drop to 11%, even though the company’s payout ratio isn’t expected to change much.

Conclusion

Overall, we are quite satisfied with Ansell’s performance. In particular, we appreciate the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive earnings growth. That said, the company’s earnings growth is expected to slow, as expected in current analyst estimates. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization 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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