Does Aquila Services Group plc’s (LON:AQSG) Recent Share Price Performance Reflect Gloomy Financial Outlook?

Given Aquila Services Group‘s (LON:AQSG) mostly flat performance over the past week, it’s easy to think there’s nothing interesting about the stock. As markets typically pay for a company’s long-term financial health, we decided to look at the company’s weak fundamentals to get a sense of what the future might hold. In this article, we have chosen to focus on the ROE of Aquila Services Group.

Return on Equity, or ROE, is a key metric used to assess how efficiently a company’s management is using the company’s capital. Put simply, it measures a company’s profitability in relation to its equity.

Check out our latest analysis for Aquila Services Group

How do you calculate return on equity?

the Formula for return on equity is:

Return on Equity = Net Income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for Aquila Services Group is:

4.4% = £260,000 ÷ £5.9 million (based on trailing 12 months to September 2021).

The “return” is the annual profit. Another way to think of it is that for every £1 of equity the company was able to make £0.04 of profit.

Why is ROE important for 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 reinvests, or “retains,” we are then able to assess a company’s future ability to generate profits. Assuming all else being equal, companies that exhibit both higher return on equity and higher earnings retention tend to be those that exhibit a higher growth rate than companies that do not share the same characteristics.

Aquila Services Group earnings growth and 4.4% ROE

At first glance, Aquila Services Group’s ROE doesn’t look very promising. Next, the company’s ROE leaves us even less excited when compared to the industry average ROE of 12%. For that reason, Aquila Services Group’s five-year net income decline of 12% isn’t surprising given its lower ROE. We assume that other factors could also play a role here. For example, it is possible that the company has allocated capital poorly or that the company has a very high payout ratio.

As a next step, we compared Aquila Services Group’s performance to the industry and found that Aquila Services Group’s performance is depressing, even compared to the industry, which has shrunk its earnings by 0.1% over the same period, which is slower is than the company.

past earnings growth

Earnings growth is an important factor in stock valuation. The investor should try to determine whether expected growth or earnings decline, whichever is the case, is being priced in. That way, he’ll get an idea of ​​whether the stock is heading into clear blue waters or if swampy waters await. A good indicator of expected earnings growth is the price-to-earnings ratio, which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you should check if Aquila Services Group is trading at a high P/E or low P/E relative to its industry.

Is Aquila Services Group using its profits efficiently?

Aquila Services Group has a high three-year median payout ratio of 69% (retaining 31% of its earnings). This suggests that the company pays out most of its profits as dividends to its shareholders. This explains to some extent why revenue has shrunk. The company is left with a small pool of capital to reinvest – a vicious cycle that doesn’t benefit the company in the long run. To learn more about the 2 risks we have identified for Aquila Services Group visit our risk dashboard for free.

Additionally, Aquila Services Group has paid dividends over a six-year period, meaning the company’s management is more focused on maintaining dividend payments despite shrinking earnings.

Summary

Overall, Aquila Services Group’s performance is a pretty big disappointment. The company posted a disappointing earnings growth rate due to its low ROE and lack of reinvestment in the business. So far, we’ve only talked briefly about the company’s earnings growth. For more insight into Aquila Services Group’s past earnings growth, check out this visualization of past earnings, revenue and cash flows.

Do you have any feedback about this article? Concerned about the content? Get in touch directly with us. Alternatively, send an email to the editorial team (at) simplywallst.com.

This Simply Wall St article is of a general nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

About Nina Snider

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