It’s hard to get excited after looking at Alfa Financial Software Holdings’ ( LON:ALFA ) recent performance, with the stock down 6.5% over the past month. But if you’re paying close attention, you might realize that its strong financials could mean the stock could potentially see an increase in value over the long term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Alfa Financial Software Holdings’ ROE.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. Put another way, it reveals the company’s success in turning shareholder investment into profits.
See our latest analysis for Alfa Financial Software Holdings
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net profit (from continuing operations) ÷ Equity
So based on the above formula, the ROE for Alfa Financial Software Holdings is:
61% = 26 million GBP ÷ 43 million GBP (Based on last 12 months to June 2023).
The ‘return’ is the annual profit. One way to conceptualize this is that for every £1 of shareholders’ capital the company has, the company earned £0.61 in profit.
Why is ROE important to earnings growth?
So far we have 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 efficiently it does so, we are then able to assess a company’s earnings growth potential. Assuming all else remains the same, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that do not necessarily carry these characteristics.
A Side-by-Side Comparison of Alfa Financial Software Holdings’ Earnings Growth and 61% Return on Equity
First of all, we like that Alfa Financial Software Holdings has an impressive ROE. Second, even compared to the industry average of 8.3%, the company’s ROE is quite impressive. This probably laid the foundation for Alfa Financial Software Holdings’ moderate 9.1% net income growth over the past five years.
Next, comparing to the industry’s net income growth, we found that Alfa Financial Software Holdings’ reported growth was lower than the industry growth of 20% over the past few years, which is not something we like to see.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to determine whether the expected growth or decline in earnings, as the case may be, is priced in. This will help them determine whether the stock’s future looks promising or ominous. Is Alfa Financial Software Holdings fairly valued compared to other companies? These 3 valuation measures can help you decide.
Is Alfa Financial Software Holdings using its earnings efficiently?
Alfa Financial Software Holdings has a low three-year median payout ratio of 15%, meaning the company retains the remaining 85% of its profits. This suggests that management is reinvesting most of the profits to grow the company.
While Alfa Financial Software Holdings has seen growth in its earnings, it only recently began paying a dividend. It is highly likely that the company has decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be approximately 17%. However, Alfa Financial Software Holdings’ future ROE is expected to fall to 39%, despite the fact that no major changes are expected in the company’s payout ratio.
Conclusion
Overall, we are quite satisfied with the performance of Alfa Financial Software Holdings. In particular, it is great to see that the company is investing heavily in its business, and together with a high rate of return, this has resulted in a respectable growth in earnings. With that said, by studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. Are these analysts’ expectations based on the broad expectations for the industry or on the company’s fundamentals? Click here to go to our analyst forecast page for the company.
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This article by Simply Wall St is of a general nature. We only provide commentary based on historical data and analyst forecasts 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 shares and does not take into account your goals or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account recent price-sensitive company announcements or qualitative material. Simply Wall St has no position in any listed stocks.