Yahoo Finance Is Ashtead Technology Holdings Plc's (LON:AT.) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?
Ashtead Technology Holdings (LON:AT.) has had a great run on the share market with its stock up by a significant 23% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Ashtead Technology Holdings' 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.
See our latest analysis for Ashtead Technology Holdings
How To 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 Ashtead Technology Holdings is:
22% = UK£22m ÷ UK£98m (Based on the trailing twelve months to December 2023).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.22 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. 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 Ashtead Technology Holdings' Earnings Growth And 22% ROE
To begin with, Ashtead Technology Holdings has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 16% the company's ROE is quite impressive. As a result, Ashtead Technology Holdings' exceptional 42% net income growth seen over the past five years, doesn't come as a surprise.
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 15% in the same period, which is great to see.
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. Has the market priced in the future outlook for AT.? You can find out in our latest intrinsic value infographic research report.
Is Ashtead Technology Holdings Making Efficient Use Of Its Profits?
Ashtead Technology Holdings has a really low three-year median payout ratio of 5.0%, meaning that it has the remaining 95% left over to reinvest into its business. So it looks like Ashtead Technology Holdings is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Along with seeing a growth in earnings, Ashtead Technology Holdings only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 3.5% over the next three years. The fact that the company's ROE is expected to rise to 42% over the same period is explained by the drop in the payout ratio.
Conclusion
Overall, we are quite pleased with Ashtead Technology Holdings' performance. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.
