PLC 4ever
Related Articles
It’s hard to get excited when looking at the recent performance of Aptitude Software Group (LON:APTD) when the stock is down 43% over the past month. However, we decided to examine the company’s financials to see if they had anything to do with the price decline. Fundamentals usually dictate market outcomes, so it makes sense to study the company’s financials. Today we will be paying special attention to Aptitude Software Group’s ROE.
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 is used to assess a company’s profitability in relation to its equity.
Check out our latest analysis for Aptitude Software Group
How do you calculate return on equity?
the Formula for ROE is:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Aptitude Software Group is:
8.9% = £5.1m ÷ £57m (based on trailing 12 months to December 2021).
“Return” is the amount earned after tax over the past 12 months. Another way to think of it is that for every £1 of equity the company was able to make £0.09 of profit.
What does ROE have 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 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 don’t share the same characteristics.
Aptitude Software Group earnings growth and 8.9% ROE
At first glance, Aptitude Software Group’s ROE doesn’t look like much. However, given that the company’s ROE matches the industry average ROE of 8.9%, we should spare ourselves some worries. But Aptitude Software Group has posted a five-year net income decline of 5.0% over the past five years. Keep in mind that the company’s ROE is a bit low to begin with. The decline in earnings could therefore also result from this.
As a next step, we compared Aptitude Software Group’s performance to the industry and were disappointed to find that the industry increased earnings by 13% over the same period while the company shrank earnings.
Earnings growth is an important metric to consider when evaluating a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This allows them to determine if the stock’s future looks bright or ominous. Is APTD Fairly Rated? This company intrinsic value infographic has everything you need to know.
Is Aptitude Software Group using its profits efficiently?
Despite a normal three-year median payout ratio of 50% (with 50% of earnings being retained), Aptitude Software Group has seen its earnings decline, as we saw above. So there could be other explanations in this regard. For example, the company’s business may deteriorate.
Additionally, Aptitude Software Group has been paying dividends for at least a decade, suggesting that maintaining dividend payments is much more important to management, even if it comes at the expense of the company’s growth. Our latest analyst data shows that the company’s future payout ratio is expected to be around 42% over the next three years. However, Aptitude Software Group’s ROE is expected to increase to 16%, although no change in payout ratio is expected.
Conclusion
Overall, we think the performance shown by Aptitude Software Group is open to many interpretations. While the company has a high reinvestment rate, the low ROE means that all of these reinvestments are of no benefit to investors and, moreover, have a negative impact on earnings growth. However, given the current analyst estimates, we noted that the company’s earnings growth rate is expected to see a huge improvement. Are these analyst expectations based on broader expectations for the industry or on company fundamentals? Click here to go to our analyst’s forecast page for the company.
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.
