Appen Limited (ASX:APX): Will the growth last?

Based on the latest analyst predictions Appen Limited (ASX:APX) is estimated to grow its earnings 46.7% over the next year. Are you considering investing? Then keep reading. I will analyse the latest data and look at the future of this high growth company in more detail. View our latest analysis for Appen

How is APX going to perform in the future?

According to the analysts covering the company the next three years should bring some good growth prospects for Appen. The estimates for earnings per share range from $0.18 to $0.22 with an average expectation of 81.9% growth.

Appen (ASX:APX) Past Future Earnings May 29th 17
Appen (ASX:APX) Past Future Earnings May 29th 17
This will project the annual earnings to levels surpassing that seen in recent earnings updates.

Revenue during the same period is expected to grow from $111 Million to $199 Million in 2019 and profits (net income) are predicted to shoot from $10 Million to $21 Million in 2019, roughly growing 2x. Margins are predicted to be a respectable 10.7% during this time as well.

Is the growth built on solid basis?

Appen has grown its earnings faster than the Software industry average over the past year.

APX has been performing remarkably well with a Return on Equity of 32.7%. This is above the Software average of 21.74%. This is expected to further improve with the stock estimated to have an outstanding ROE of 32%.

Appen (ASX:APX) Future Perf May 29th 17
Appen (ASX:APX) Future Perf May 29th 17

Return on equity (ROE) is a measure of how much profit (net income) a company makes as a percentage of the shareholders equity. Equity is made up of funds from the original issuing of shares and any retained earnings from previous financial years. It varies considerably across sectors, for this reason it is important to asses a stocks ROE relative to its industry. Whilst it is true that the higher the ROE the better the company is performing, ROE does have a weakness. A stock with a disproportionate amount of debt can lead to a small equity base. Thus, a small amount of net income (the numerator) could still produce a high ROE off a modest equity base (the denominator). For this reason investors should always consider the debt situation in conjunction with ROE.

Conclusion

Appen is a fast growing company, but as Warren Buffett’s right-hand man Charlie Munger said, “No matter how wonderful a business is, it’s not worth an infinite price“. Is APX overpriced? Or could it be considered an undervalued opportunity? I recommend you see our latest FREE analysis to find out!

If you are not interested in APX anymore, you can use our free platform to see my list of over 150 other stocks with a high growth potential.