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Is Alimentation Couche-Tard Inc.'s (TSE:ATD.B) Recent Performance Tethered To Its Attractive Financial Prospects?

Most readers would already know that Alimentation Couche-Tard's (TSE:ATD.B) stock increased by 8.3% 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. Particularly, we will be paying attention to Alimentation Couche-Tard's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Alimentation Couche-Tard

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Alimentation Couche-Tard is:

22% = US$2.7b ÷ US$12b (Based on the trailing twelve months to January 2021).

The 'return' is the yearly profit. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.22 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Alimentation Couche-Tard's Earnings Growth And 22% ROE

Firstly, we acknowledge that Alimentation Couche-Tard has a significantly high ROE. Secondly, even when compared to the industry average of 13% the company's ROE is quite impressive. Probably as a result of this, Alimentation Couche-Tard was able to see a decent net income growth of 19% over the last five years.

As a next step, we compared Alimentation Couche-Tard's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 11%.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for ATD.B? You can find out in our latest intrinsic value infographic research report.

Is Alimentation Couche-Tard Making Efficient Use Of Its Profits?

Alimentation Couche-Tard has a low three-year median payout ratio of 9.5%, meaning that the company retains the remaining 90% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Besides, Alimentation Couche-Tard has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 12% over the next three years.

Conclusion

In total, we are pretty happy with Alimentation Couche-Tard's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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