Amadeus FiRe AG's (ETR:AAD) Stock Is Going Strong: Is the Market Following Fundamentals?
Most readers would already be aware that Amadeus FiRe's (ETR:AAD) stock increased significantly by 12% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Amadeus FiRe'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Amadeus FiRe
How Do You Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Amadeus FiRe is:
32% = €46m ÷ €143m (Based on the trailing twelve months to September 2023).
The 'return' is the yearly profit. That means that for every €1 worth of shareholders' equity, the company generated €0.32 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Amadeus FiRe's Earnings Growth And 32% ROE
First thing first, we like that Amadeus FiRe has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 6.7% which is quite remarkable. Probably as a result of this, Amadeus FiRe was able to see a decent net income growth of 14% over the last five years.
Next, on comparing Amadeus FiRe's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 14% over the last few years.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Amadeus FiRe's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Amadeus FiRe Using Its Retained Earnings Effectively?
Amadeus FiRe has a healthy combination of a moderate three-year median payout ratio of 49% (or a retention ratio of 51%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.
Besides, Amadeus FiRe 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 future payout ratio of the company is expected to rise to 61% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 25% over the same period.
Conclusion
In total, we are pretty happy with Amadeus FiRe'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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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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.
