Could The Market Be Wrong About Aegean Airlines S.A. (ATH:AEGN) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at Aegean Airlines' (ATH:AEGN) recent performance, when its stock has declined 6.3% over the past month. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Aegean Airlines' ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Aegean Airlines

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Aegean Airlines is:

40% = €169m ÷ €419m (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.40.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Aegean Airlines' Earnings Growth And 40% ROE

First thing first, we like that Aegean Airlines has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 27% also doesn't go unnoticed by us. As a result, Aegean Airlines' exceptional 29% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Aegean Airlines' 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 6.3%.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Aegean Airlines is trading on a high P/E or a low P/E, relative to its industry.

Is Aegean Airlines Making Efficient Use Of Its Profits?

The three-year median payout ratio for Aegean Airlines is 40%, which is moderately low. The company is retaining the remaining 60%. By the looks of it, the dividend is well covered and Aegean Airlines is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Aegean Airlines is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 58% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 20%) over the same period.

Summary

Overall, we are quite pleased with Aegean Airlines' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.