Yahoo Finance Is AFT Pharmaceuticals Limited's (NZSE:AFT) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?
AFT Pharmaceuticals (NZSE:AFT) has had a great run on the share market with its stock up by a significant 10% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on AFT Pharmaceuticals' ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for AFT Pharmaceuticals
How To Calculate Return On Equity?
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 AFT Pharmaceuticals is:
15% = NZ$11m ÷ NZ$74m (Based on the trailing twelve months to September 2023).
The 'return' is the profit over the last twelve months. That means that for every NZ$1 worth of shareholders' equity, the company generated NZ$0.15 in profit.
What Has ROE Got To Do With 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. 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.
AFT Pharmaceuticals' Earnings Growth And 15% ROE
To start with, AFT Pharmaceuticals' ROE looks acceptable. Further, the company's ROE is similar to the industry average of 17%. This probably goes some way in explaining AFT Pharmaceuticals' significant 36% net income growth over the past five years amongst other factors. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing AFT Pharmaceuticals' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 33% over the last few years.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is AFT Pharmaceuticals fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is AFT Pharmaceuticals Efficiently Re-investing Its Profits?
AFT Pharmaceuticals has a really low three-year median payout ratio of 9.1%, meaning that it has the remaining 91% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.
Along with seeing a growth in earnings, AFT Pharmaceuticals only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 15% over the next three years. Still, forecasts suggest that AFT Pharmaceuticals' future ROE will rise to 23% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.
Summary
Overall, we are quite pleased with AFT Pharmaceuticals' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.
