It is hard to get excited after looking at Alpha Financial Markets Consulting's (LON:AFM) recent performance, when its stock has declined 9.1% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Alpha Financial Markets Consulting's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Alpha Financial Markets Consulting
How Is ROE Calculated?
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 Alpha Financial Markets Consulting is:
12% = UK£18m ÷ UK£148m (Based on the trailing twelve months to September 2022).
The 'return' is the profit over the last twelve months. That means that for every £1 worth of shareholders' equity, the company generated £0.12 in 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 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.
Alpha Financial Markets Consulting's Earnings Growth And 12% ROE
At first glance, Alpha Financial Markets Consulting seems to have a decent ROE. Be that as it may, the company's ROE is still quite lower than the industry average of 21%. That being the case, the significant five-year 27% net income growth reported by Alpha Financial Markets Consulting comes as a pleasant surprise. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this also does lend some color to the high earnings growth seen by the company.
As a next step, we compared Alpha Financial Markets Consulting's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 6.2%.