Should the weakness in ALK-Abelló A/S (CPH:ALK B) stock be taken as a sign that the market will correct the stock price given the decent financials?

With its stock down 9.0% over the past month, it’s easy to overlook ALK-Abelló (CPH:ALK B). 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. In this article, we have decided to focus on the ROE of ALK-Abelló.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simple terms, it is used to assess the profitability of a company in relation to its equity.

Discover our latest analysis for ALK-Abelló

How do you calculate return on equity?

Return on equity can be calculated using the formula:

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

So, based on the above formula, the ROE for ALK-Abelló is:

7.0% = 255 million kr ÷ 3.7 billion kr (based on the last twelve months until March 2022).

The “yield” is the profit of the last twelve months. This therefore means that for each investment of 1 DKK by its shareholder, the company generates a profit of 0.07 DKK.

Why is ROE important for earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

ALK-Abelló earnings growth and ROE of 7.0%

At first glance, ALK-Abelló’s ROE does not look very promising. Then, compared to the industry average ROE of 13%, the company’s ROE leaves us even less excited. Despite this, surprisingly, ALK-Abelló has experienced exceptional net profit growth of 38% over the past five years. Therefore, there could be other reasons behind this growth. 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.

As a next step, we compared ALK-Abelló’s net income growth with the industry, and fortunately, we found that the growth the company saw was above the industry average growth of 11%. .

CPSE: ALK B Past Earnings Growth June 3, 2022

Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. What is ALK B worth today? The intrinsic value infographic in our free research report helps visualize whether ALK B is currently being mispriced by the market.

Is ALK-Abelló effectively using its retained earnings?

ALK-Abelló currently pays no dividends, which essentially means that it has reinvested all of its profits back into the business. This certainly contributes to the high earnings growth number we discussed above.

Summary

All in all, it seems that ALK-Abelló presents some positive aspects of its activity. With a high reinvestment rate, albeit at a low ROE, the company managed to see considerable growth in earnings. The latest forecasts from industry analysts show that the company should maintain its current growth rate. 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

Check Also

TRE: Approval of TCFD recommendations and improvement of the structure of climate change initiatives

June 15, 2022 Company Name: TRE HOLDINGS CORPORATION Representing: Mitsuo Abe, President and Chief Operating …