Could The Market Be Wrong About AdvanSix Inc. (NYSE:ASIX) Given Its Attractive Financial Prospects?
It is hard to get excited after looking at AdvanSix's (NYSE:ASIX) recent performance, when its stock has declined 17% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to AdvanSix'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for AdvanSix
How Is ROE Calculated?
ROE 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 AdvanSix is:
19% = US$144m ÷ US$758m (Based on the trailing twelve months to March 2023).
The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.19 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. 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 AdvanSix's Earnings Growth And 19% ROE
To start with, AdvanSix's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 16%. Consequently, this likely laid the ground for the decent growth of 17% seen over the past five years by AdvanSix.
We then performed a comparison between AdvanSix's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 15% in the same period.
Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for ASIX? You can find out in our latest intrinsic value infographic research report.
Is AdvanSix Using Its Retained Earnings Effectively?
AdvanSix has a low three-year median payout ratio of 7.5%, meaning that the company retains the remaining 93% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.
Along with seeing a growth in earnings, AdvanSix only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.
Conclusion
On the whole, we feel that AdvanSix's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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.
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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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