Simply Wall St
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Most readers would already know that Allied Farmers’ (NZSE:ALF) stock increased by 4.2% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Allied Farmers’ ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Allied Farmers is:
30% = NZ$7.5m ÷ NZ$25m (Based on the trailing twelve months to December 2024).
The ‘return’ is the profit over the last twelve months. One way to conceptualize this is that for each NZ$1 of shareholders’ capital it has, the company made NZ$0.30 in profit.
View our latest analysis for Allied Farmers
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
Firstly, we acknowledge that Allied Farmers has a significantly high ROE. Secondly, even when compared to the industry average of 6.8% the company’s ROE is quite impressive. Under the circumstances, Allied Farmers’ considerable five year net income growth of 35% was to be expected.
Given that the industry shrunk its earnings at a rate of 7.3% over the last few years, the net income growth of the company is quite impressive.
Earnings growth is an important metric to consider when valuing a stock. 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. If you’re wondering about Allied Farmers”s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
