U.S. markets open in 8 hours 17 minutes
  • S&P Futures

    3,733.25
    +1.25 (+0.03%)
     
  • Dow Futures

    29,761.00
    +11.00 (+0.04%)
     
  • Nasdaq Futures

    11,545.00
    -10.75 (-0.09%)
     
  • Russell 2000 Futures

    1,722.50
    +1.70 (+0.10%)
     
  • Crude Oil

    81.80
    -0.35 (-0.43%)
     
  • Gold

    1,660.00
    -10.00 (-0.60%)
     
  • Silver

    18.74
    -0.14 (-0.74%)
     
  • EUR/USD

    0.9685
    -0.0054 (-0.55%)
     
  • 10-Yr Bond

    3.7050
    0.0000 (0.00%)
     
  • Vix

    30.18
    -2.42 (-7.42%)
     
  • GBP/USD

    1.0807
    -0.0079 (-0.73%)
     
  • USD/JPY

    144.4810
    +0.3590 (+0.25%)
     
  • BTC-USD

    19,573.49
    +815.49 (+4.35%)
     
  • CMC Crypto 200

    446.94
    +18.16 (+4.24%)
     
  • FTSE 100

    7,005.39
    +20.80 (+0.30%)
     
  • Nikkei 225

    26,426.34
    +252.36 (+0.96%)
     

Is Arcosa, Inc.'s (NYSE:ACA) Stock Price Struggling As A Result Of Its Mixed Financials?

·4 min read

Arcosa (NYSE:ACA) has had a rough month with its share price down 11%. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Particularly, we will be paying attention to Arcosa'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.

Check out our latest analysis for Arcosa

How Is ROE Calculated?

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 Arcosa is:

3.7% = US$71m ÷ US$1.9b (Based on the trailing twelve months to September 2021).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.04 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.

A Side By Side comparison of Arcosa's Earnings Growth And 3.7% ROE

As you can see, Arcosa's ROE looks pretty weak. Not just that, even compared to the industry average of 9.4%, the company's ROE is entirely unremarkable. Therefore, Arcosa's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by17% in the same period.

past-earnings-growth
past-earnings-growth

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. 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 ACA? You can find out in our latest intrinsic value infographic research report.

Is Arcosa Efficiently Re-investing Its Profits?

Arcosa's low three-year median payout ratio of 8.3% (implying that the company keeps92% of its income) should mean that the company is retaining most of its earnings to fuel its growth and this should be reflected in its growth number, but that's not the case.

Moreover, Arcosa has been paying dividends for three years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 6.2% over the next three years. As a result, the expected drop in Arcosa's payout ratio explains the anticipated rise in the company's future ROE to 5.3%, over the same period.

Conclusion

On the whole, we feel that the performance shown by Arcosa can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.

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.