Aussie Broadband Limited's (ASX:ABB) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

By
Simply Wall St
Published
April 17, 2022
ASX:ABB
Source: Shutterstock

Aussie Broadband (ASX:ABB) has had a great run on the share market with its stock up by a significant 25% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Aussie Broadband'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Aussie Broadband

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 Aussie Broadband is:

3.9% = AU$7.4m ÷ AU$191m (Based on the trailing twelve months to December 2021).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.04 in profit.

What Has ROE Got To Do With 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Aussie Broadband's Earnings Growth And 3.9% ROE

At first glance, Aussie Broadband's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 3.9%, we may spare it some thought. But then again, Aussie Broadband's five year net income shrunk at a rate of 6.8%. Bear in mind, the company does have a slightly low ROE. Therefore, the decline in earnings could also be the result of this.

That being said, we compared Aussie Broadband's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 26% in the same period.

past-earnings-growth
ASX:ABB Past Earnings Growth April 17th 2022

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is ABB fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Aussie Broadband Using Its Retained Earnings Effectively?

Aussie Broadband doesn't pay any dividend, meaning that the company is keeping all of its profits, which makes us wonder why it is retaining its earnings if it can't use them to grow its business. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Summary

In total, we're a bit ambivalent about Aussie Broadband's performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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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