Yahoo Finance Anpario plc's (LON:ANP) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?
Anpario (LON:ANP) has had a great run on the share market with its stock up by a significant 6.5% over the last month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Anpario's ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Anpario
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Anpario is:
7.5% = UK£2.5m ÷ UK£34m (Based on the trailing twelve months to December 2023).
The 'return' refers to a company's earnings over the last year. That means that for every £1 worth of shareholders' equity, the company generated £0.08 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 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.
Anpario's Earnings Growth And 7.5% ROE
At first glance, Anpario's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.1%. Having said that, Anpario's five year net income decline rate was 5.4%. Bear in mind, the company does have a slightly low ROE. So that's what might be causing earnings growth to shrink.
Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate of 3.9% over the last few years, we found that Anpario's performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is ANP worth today? The intrinsic value infographic in our free research report helps visualize whether ANP is currently mispriced by the market.
Is Anpario Making Efficient Use Of Its Profits?
In spite of a normal three-year median payout ratio of 46% (that is, a retention ratio of 54%), the fact that Anpario's earnings have shrunk is quite puzzling. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Additionally, Anpario has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 73% over the next three years.
Summary
In total, we're a bit ambivalent about Anpario's performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 3 risks we have identified for Anpario by visiting our risks dashboard for free on our platform here.
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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.
