Are Strong Financial Prospects The Force That Is Driving The Momentum In AlzChem Group AG's ETR:ACT) Stock?

Most readers would already be aware that AlzChem Group's (ETR:ACT) stock increased significantly by 42% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study AlzChem Group's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for AlzChem Group

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 AlzChem Group is:

21% = €35m ÷ €164m (Based on the trailing twelve months to December 2023).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.21 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

A Side By Side comparison of AlzChem Group's Earnings Growth And 21% ROE

Firstly, we acknowledge that AlzChem Group has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 7.5% which is quite remarkable. This likely paved the way for the modest 13% net income growth seen by AlzChem Group over the past five years.

We then performed a comparison between AlzChem Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 13% in the same 5-year 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. This then helps them determine if the stock is placed for a bright or bleak future. Is AlzChem Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is AlzChem Group Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 35% (implying that the company retains 65% of its profits), it seems that AlzChem Group is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, AlzChem Group has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 36%. As a result, AlzChem Group's ROE is not expected to change by much either, which we inferred from the analyst estimate of 20% for future ROE.

Summary

In total, we are pretty happy with AlzChem Group's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.

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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.