Do Its Financials Have Any Role To Play In Driving Acrow Formwork and Construction Services Limited's (ASX:ACF) Stock Up Recently?
Acrow Formwork and Construction Services (ASX:ACF) has had a great run on the share market with its stock up by a significant 16% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Acrow Formwork and Construction Services' ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Acrow Formwork and Construction Services
How Is ROE Calculated?
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 Acrow Formwork and Construction Services is:
3.6% = AU$2.0m ÷ AU$55m (Based on the trailing twelve months to December 2019).
The 'return' is the amount earned after tax over the last twelve months. That means that for every A$1 worth of shareholders' equity, the company generated A$0.04 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of Acrow Formwork and Construction Services' Earnings Growth And 3.6% ROE
As you can see, Acrow Formwork and Construction Services' ROE looks pretty weak. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 3.6%. However, the exceptional 60% net income growth seen by Acrow Formwork and Construction Services over the past five years is pretty remarkable. We reckon that there could also be other factors at play thats influencing the company's growth. Such as - high earnings retention or an efficient management in place.
We then compared Acrow Formwork and Construction Services' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 29% in the same period.
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. Doing so will help them establish if the stock's future looks promising or ominous. Is Acrow Formwork and Construction Services fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Acrow Formwork and Construction Services Efficiently Re-investing Its Profits?
Acrow Formwork and Construction Services has a three-year median payout ratio of 32% (where it is retaining 68% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Acrow Formwork and Construction Services is reinvesting its earnings efficiently.
Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 46% over the next three years. Still, forecasts suggest that Acrow Formwork and Construction Services' future ROE will rise to 16% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.
Summary
Overall, we feel that Acrow Formwork and Construction Services certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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.
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