Is Alfa Financial Software Holdings PLC's (LON:ALFA) Recent Stock Performance Influenced By Its Fundamentals In Any Way?
Alfa Financial Software Holdings' (LON:ALFA) stock is up by a considerable 13% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Alfa Financial Software Holdings' ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Alfa Financial Software Holdings
How Is ROE Calculated?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Alfa Financial Software Holdings is:
58% = UK£25m ÷ UK£42m (Based on the trailing twelve months to December 2022).
The 'return' is the yearly profit. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.58 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
Alfa Financial Software Holdings' Earnings Growth And 58% ROE
Firstly, we acknowledge that Alfa Financial Software Holdings has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 8.0% also doesn't go unnoticed by us. Given the circumstances, we can't help but wonder why Alfa Financial Software Holdings saw little to no growth in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. These include low earnings retention or poor allocation of capital
Next, on comparing with the industry net income growth, we found that Alfa Financial Software Holdings' reported growth was lower than the industry growth of 14% in the same period, which is not something we like to see.
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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Alfa Financial Software Holdings is trading on a high P/E or a low P/E, relative to its industry.
Is Alfa Financial Software Holdings Efficiently Re-investing Its Profits?
Alfa Financial Software Holdings' low three-year median payout ratio of 15%, (meaning the company retains85% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.
Additionally, Alfa Financial Software Holdings started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 17% of its profits over the next three years. However, Alfa Financial Software Holdings' future ROE is expected to decline to 29% despite there being not much change anticipated in the company's payout ratio.
Conclusion
On the whole, we do feel that Alfa Financial Software Holdings has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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