Aurizon Holdings’ (ASX:AZJ) stock is up by a considerable 7.0% over the past month. Given that stock prices are usually aligned with a company’s financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Aurizon Holdings’ ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Aurizon Holdings
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 Aurizon Holdings is:
14%=AU$597m ÷ AU$4.3b (Based on the trailing twelve months to December 2021).
The ‘return’ is the yearly profit. So, this means that for every A$1 of its shareholder’s investments, the company generates a profit of A$0.14.
What Has ROE Got To Do With Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. 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 Aurizon Holdings’ Earnings Growth And 14% ROE
To start with, Aurizon Holdings’ ROE looks acceptable. On comparing with the average industry ROE of 8.7% the company’s ROE looks pretty remarkable. Probably as a result of this, Aurizon Holdings was able to see an impressive net income growth of 23% over the last five years. We believe that there might also be other aspects that are positively influencing the company’s earnings growth. Such as – high earnings retention or an efficient management in place.
Given that the industry shrunk its earnings at a rate of 5.2% in the same period, the net income growth of the company is quite impressive.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you’re wondering about Aurizon Holdings”s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Aurizon Holdings Making Efficient Use Of Its Profits?
Aurizon Holdings has a significant three-year median payout ratio of 93%, meaning the company only retains 6.7% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.
Moreover, Aurizon Holdings is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 93%. Therefore, the company’s future ROE is also not expected to change by much with analysts predicting an ROE of 13%.
On the whole, we do feel that Aurizon Holdings has some positive attributes. Specifically, its high ROE which likely led to the growth in earnings. Bear in mind, the company reinvests little to none of its profits, which means that investors aren’t necessarily reaping the full benefits of the high rate of return. With that said, the latest industry analyst forecasts reveal that the company’s earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page 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.