Is Ava Risk Group Limited's (ASX:AVA) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Most readers would already be aware that Ava Risk Group's (ASX:AVA) stock increased significantly by 17% over the past week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Ava Risk Group's ROE today.

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.

See our latest analysis for Ava Risk Group

How To Calculate Return On Equity?

Return on equity 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 Ava Risk Group is:

19% = AU$4.9m ÷ AU$25m (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. That means that for every A$1 worth of shareholders' equity, the company generated A$0.19 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. 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.

A Side By Side comparison of Ava Risk Group's Earnings Growth And 19% ROE

To begin with, Ava Risk Group seems to have a respectable ROE. Especially when compared to the industry average of 13% the company's ROE looks pretty impressive. Probably as a result of this, Ava Risk Group was able to see a decent growth of 5.3% over the last five years.

As a next step, we compared Ava Risk Group's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 16% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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 Ava Risk Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Ava Risk Group Making Efficient Use Of Its Profits?

Summary

Overall, we are quite pleased with Ava Risk Group's 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 respectable growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. 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.
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