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Is Ashley Services Group Limited's(ASX:ASH) Recent Stock Performance Tethered To Its Strong Fundamentals?

Simply Wall St
·4 min read

Ashley Services Group's (ASX:ASH) stock is up by a considerable 17% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Ashley Services Group's ROE.

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.

View our latest analysis for Ashley Services Group

How To Calculate Return On Equity?

Return on equity 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 Ashley Services Group is:

20% = AU$5.1m ÷ AU$26m (Based on the trailing twelve months to July 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.20 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Ashley Services Group's Earnings Growth And 20% ROE

To start with, Ashley Services Group's ROE looks acceptable. Especially when compared to the industry average of 15% the company's ROE looks pretty impressive. This certainly adds some context to Ashley Services Group's exceptional 61% net income growth seen over the past five years. However, there could also be other causes 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.

Next, on comparing with the industry net income growth, we found that Ashley Services Group's growth is quite high when compared to the industry average growth of 10% in the same period, which is great to see.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Ashley Services Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Ashley Services Group Making Efficient Use Of Its Profits?

Ashley Services Group has a significant three-year median payout ratio of 71%, meaning the company only retains 29% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Besides, Ashley Services Group has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we feel that Ashley Services Group's performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Ashley Services Group and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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.