The shares of Amiad Water Systems Ltd. (LON: AFS) is up, but financial data looks ambiguous: will momentum continue?
Amiad Water Systems (LON: AFS) has seen strong growth in the equity market with stock rising 29% over the past three months. However, we wonder if the inconsistent financial data of the company would negatively impact the current momentum of the share price. Specifically, we decided to study the ROE of Amiad Water Systems in this article.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by shareholders to the company.
Check out our latest review for Amiad Water Systems
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Amiad Water Systems is:
4.4% = US $ 3.6 million ÷ US $ 82 million (based on the last twelve months up to December 2020).
The “return” is the annual profit. Another way to think about this is that for every £ 1 of equity the company was able to earn £ 0.04 in profit.
What does ROE have to do with profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the business is reinvesting or “withholding” for future growth, which then gives us a sense of the growth potential of the business. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate compared to companies that do not. the same characteristics.
Profit growth and ROE of 4.4% of Amiad Water Systems
At first glance, Amiad Water Systems’ ROE isn’t much to say. Then, compared to the industry’s average ROE of 11%, the company’s ROE leaves us even less enthusiastic. Given the circumstances, the significant drop in net income of 35% observed by Amiad Water Systems over the past five years is not surprising. However, other factors could also cause lower income. For example, it is possible that the company has misallocated capital or that the company has a very high payout ratio.
However, when we compared Amiad Water Systems’ growth to that of the industry, we found that although the company’s profits were declining, the industry saw a 9.0% profit growth over the past year. during the same period. It is quite worrying.
Profit growth is an important factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. Is Amiad Water Systems valued fairly compared to other companies? These 3 evaluation measures could help you make a decision.
Is Amiad Water Systems Efficiently Using Its Retained Earnings?
Although the company has paid part of its dividend in the past, it does not currently pay a dividend. This implies that potentially all of its profits are reinvested in the business.
Overall, we have mixed feelings about Amiad Water Systems. Although the company has a high rate of profit retention, its low rate of return is likely to hamper its profit growth. That said, we have looked at the latest analysts’ forecast and found that while the company has cut profits in the past, analysts expect its profits to rise in the future. Are these analyst expectations based on general industry expectations or on company fundamentals? Click here to go to our business analyst’s forecast page.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St does not have any position in the mentioned stocks.
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