Most readers would already be aware that Ashtead Technology Holdings’ (LON:AT.) stock increased significantly by 18% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Ashtead Technology Holdings’ ROE today.
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.
View our latest analysis for Ashtead Technology Holdings
How Is ROE Calculated?
ROE 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 Ashtead Technology Holdings is:
20% = UK£17m ÷ UK£85m (Based on the trailing twelve months to June 2023).
The ‘return’ is the profit over the last twelve months. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.20 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
Ashtead Technology Holdings’ Earnings Growth And 20% ROE
At first glance, Ashtead Technology Holdings seems to have a decent ROE. Further, the company’s ROE compares quite favorably to the industry average of 15%. This certainly adds some context to Ashtead Technology Holdings’ exceptional 39% net income growth seen over the past five years. However, there could also be other causes behind this growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.
Next, on comparing with the industry net income growth, we found that Ashtead Technology Holdings’ growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Ashtead Technology Holdings is trading on a high P/E or a low P/E, relative to its industry.
Is Ashtead Technology Holdings Using Its Retained Earnings Effectively?
Ashtead Technology Holdings’ three-year median payout ratio to shareholders is 5.3%, which is quite low. This implies that the company is retaining 95% of its profits. So it looks like Ashtead Technology Holdings is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 4.7% of its profits over the next three years. Accordingly, forecasts suggest that Ashtead Technology Holdings’ future ROE will be 22% which is again, similar to the current ROE.
Conclusion
On the whole, we feel that Ashtead Technology Holdings’ performance has been quite good. 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 sizeable growth in its earnings. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.
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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.
