Has ARC Document Solutions, Inc.'s (NYSE:ARC) Impressive Stock Performance Got Anything to Do With Its Fundamentals?
ARC Document Solutions (NYSE:ARC) has had a great run on the share market with its stock up by a significant 20% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study ARC Document Solutions' ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for ARC Document Solutions
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 ARC Document Solutions is:
6.8% = US$11m ÷ US$157m (Based on the trailing twelve months to March 2023).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.07 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 ARC Document Solutions' Earnings Growth And 6.8% ROE
At first glance, ARC Document Solutions' ROE doesn't look very promising. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 11% either. In spite of this, ARC Document Solutions was able to grow its net income considerably, at a rate of 50% in the last five years. Therefore, there could be other reasons behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
As a next step, we compared ARC Document Solutions' 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 9.9%.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is ARC worth today? The intrinsic value infographic in our free research report helps visualize whether ARC is currently mispriced by the market.
Is ARC Document Solutions Using Its Retained Earnings Effectively?
The three-year median payout ratio for ARC Document Solutions is 38%, which is moderately low. The company is retaining the remaining 62%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like ARC Document Solutions is reinvesting its earnings efficiently.
Moreover, ARC Document Solutions is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend.
Conclusion
On the whole, we do feel that ARC Document Solutions has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.
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