Yahoo Finance Could The Market Be Wrong About Alfa Financial Software Holdings PLC (LON:ALFA) Given Its Attractive Financial Prospects?
With its stock down 3.0% over the past three months, it is easy to disregard Alfa Financial Software Holdings (LON:ALFA). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Alfa Financial Software Holdings' ROE in this article.
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.
View our latest analysis for Alfa Financial Software Holdings
How Do You Calculate Return On Equity?
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 Alfa Financial Software Holdings is:
56% = UK£24m ÷ UK£42m (Based on the trailing twelve months to December 2023).
The 'return' is the yearly profit. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.56 in profit.
What Is The Relationship Between ROE And 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.
A Side By Side comparison of Alfa Financial Software Holdings' Earnings Growth And 56% ROE
First thing first, we like that Alfa Financial Software Holdings has an impressive ROE. Secondly, even when compared to the industry average of 7.6% the company's ROE is quite impressive. This probably laid the groundwork for Alfa Financial Software Holdings' moderate 13% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Alfa Financial Software Holdings' reported growth was lower than the industry growth of 21% over the last few years, which is not something we like 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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Alfa Financial Software Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Alfa Financial Software Holdings Using Its Retained Earnings Effectively?
In Alfa Financial Software Holdings' case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 15% (or a retention ratio of 85%), which suggests that the company is investing most of its profits to grow its business.
Additionally, Alfa Financial Software Holdings has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 14%. Regardless, Alfa Financial Software Holdings' ROE is speculated to decline to 31% despite there being no anticipated change in its payout ratio.
Conclusion
Overall, we are quite pleased with Alfa Financial Software Holdings' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of 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 latest analysts predictions for the company, check out this visualization of analyst forecasts 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.
