Do Fundamentals Have Any Role To Play In Driving Air New Zealand Limited's (NZSE:AIR) Stock Up Recently?

editorial-team@simplywallst.com (Simply Wall St)

Tue, Mar 18, 2025, 8:54 PM 4 min read

Most readers would already know that Air New Zealand's (NZSE:AIR) stock increased by 9.8% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Air New Zealand's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Air New Zealand

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 Air New Zealand is:

6.0% = NZ$123m ÷ NZ$2.1b (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each NZ$1 of shareholders' capital it has, the company made NZ$0.06 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Air New Zealand's Earnings Growth And 6.0% ROE

When you first look at it, Air New Zealand's ROE doesn't look that attractive. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 20%. In spite of this, Air New Zealand was able to grow its net income considerably, at a rate of 41% in the last five years. Therefore, there could be other reasons behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Air New Zealand's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 41% in the same period.

past-earnings-growth — NZSE:AIR Past Earnings Growth March 19th 2025

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is AIR fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Air New Zealand Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 57% (implying that it keeps only 43% of profits) for Air New Zealand suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Moreover, Air New Zealand is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 56%. Regardless, the future ROE for Air New Zealand is predicted to rise to 13% despite there being not much change expected in its payout ratio.

Conclusion

Overall, we feel that Air New Zealand certainly does have some positive factors to consider. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. 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 company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.