Are APM Human Services International Limited's (ASX:APM) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

APM Human Services International (ASX:APM) has had a rough three months with its share price down 16%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to APM Human Services International's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for APM Human Services International

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 APM Human Services International is:

9.1% = AU$134m ÷ AU$1.5b (Based on the trailing twelve months to December 2022).

The 'return' is the amount earned after tax over the last twelve months. That means that for every A$1 worth of shareholders' equity, the company generated A$0.09 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

A Side By Side comparison of APM Human Services International's Earnings Growth And 9.1% ROE

When you first look at it, APM Human Services International's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 16%, the company's ROE leaves us feeling even less enthusiastic. However, we we're pleasantly surprised to see that APM Human Services International grew its net income at a significant rate of 80% in the last five years. So, there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that APM Human Services International's growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 APM Human Services International is trading on a high P/E or a low P/E, relative to its industry.

Is APM Human Services International Efficiently Re-investing Its Profits?

APM Human Services International has a significant three-year median payout ratio of 68%, meaning the company only retains 32% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Along with seeing a growth in earnings, APM Human Services International only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 60%. Still, forecasts suggest that APM Human Services International's future ROE will rise to 12% even though the the company's payout ratio is not expected to change by much.

Summary

Overall, we feel that APM Human Services International 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.