42.96 F
London
December 22, 2024
PI Global Investments
Finance

Is Weakness In Elders Limited (ASX:ELD) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?


It is hard to get excited after looking at Elders’ (ASX:ELD) recent performance, when its stock has declined 4.7% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Elders’ 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.

View our latest analysis for Elders

How Do You 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 Elders is:

12% = AU$106m ÷ AU$867m (Based on the trailing twelve months to September 2023).

The ‘return’ is the income the business earned over the last year. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.12 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. 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.

Elders’ Earnings Growth And 12% ROE

To start with, Elders’ ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 11%. Consequently, this likely laid the ground for the decent growth of 12% seen over the past five years by Elders.

We then compared Elders’ net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 16% in the same 5-year period, which is a bit concerning.

past-earnings-growthpast-earnings-growth

past-earnings-growth

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. Has the market priced in the future outlook for ELD? You can find out in our latest intrinsic value infographic research report.

Is Elders Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 45% (implying that the company retains 55% of its profits), it seems that Elders is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that’s well covered.

Besides, Elders has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 59% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Conclusion

Overall, we are quite pleased with Elders’ performance. In particular, it’s great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a respectable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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.



Source link

Related posts

Professional services group records “resilient” first half financial performance

D.William

Atlantica Reports 2023 Financial Results

D.William

Tradewave Capital Plc Solidifies Its Position in Financial Markets with Vienna Stock Exchange Listing

D.William

Leave a Comment

* By using this form you agree with the storage and handling of your data by this website.