Yahoo Finance Do Its Financials Have Any Role To Play In Driving Koninklijke Ahold Delhaize N.V.'s (AMS:AD) Stock Up Recently?
Koninklijke Ahold Delhaize's (AMS:AD) stock is up by a considerable 14% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Koninklijke Ahold Delhaize's ROE in this article.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Koninklijke Ahold Delhaize
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 Koninklijke Ahold Delhaize is:
17% = €2.5b ÷ €15b (Based on the trailing twelve months to January 2023).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.17.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Koninklijke Ahold Delhaize's Earnings Growth And 17% ROE
At first glance, Koninklijke Ahold Delhaize seems to have a decent ROE. Especially when compared to the industry average of 10% the company's ROE looks pretty impressive. Despite this, Koninklijke Ahold Delhaize's five year net income growth was quite low averaging at only 3.7%. That's a bit unexpected from a company which has such a high rate of return. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.
As a next step, we compared Koninklijke Ahold Delhaize's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 12% in the same period.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for AD? You can find out in our latest intrinsic value infographic research report.
Is Koninklijke Ahold Delhaize Using Its Retained Earnings Effectively?
Despite having a normal three-year median payout ratio of 44% (or a retention ratio of 56% over the past three years, Koninklijke Ahold Delhaize has seen very little growth in earnings as we saw above. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.
Additionally, Koninklijke Ahold Delhaize 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 42%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 16%.
Summary
On the whole, we do feel that Koninklijke Ahold Delhaize has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to 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.
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