Stock Analysis

Has ABO Wind AG's (HMSE:AB9) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

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HMSE:AB9
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Most readers would already be aware that ABO Wind's (HMSE:AB9) stock increased significantly by 6.8% over the past week. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on ABO Wind's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for ABO Wind

How Do You 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 ABO Wind is:

9.4% = €13m ÷ €140m (Based on the trailing twelve months to December 2020).

The 'return' is the yearly profit. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.09.

Why Is ROE Important For Earnings Growth?

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

ABO Wind's Earnings Growth And 9.4% ROE

At first glance, ABO Wind seems to have a decent ROE. Especially when compared to the industry average of 3.5% the company's ROE looks pretty impressive. However, we are curious as to how the high returns still resulted in flat growth for ABO Wind in the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

We then compared ABO Wind's net income growth with the industry and found that the average industry growth rate was 6.2% in the same period.

past-earnings-growth
HMSE:AB9 Past Earnings Growth May 28th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Has the market priced in the future outlook for AB9? You can find out in our latest intrinsic value infographic research report.

Is ABO Wind Making Efficient Use Of Its Profits?

Despite having a moderate three-year median payout ratio of 26% (meaning the company retains74% of profits) in the last three-year period, ABO Wind's earnings growth was more or les flat. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, ABO Wind has been paying dividends over a period of three years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 58% over the next three years. However, ABO Wind's future ROE is expected to rise to 13% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Conclusion

Overall, we feel that ABO Wind certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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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About HMSE:AB9

ABO Wind

ABO Wind AG develops renewable energy projects in Germany, Finland, France, Spain, Argentina, Greece, Ireland, Poland, Tunisia, Hungary, the United Kingdom, the Netherlands, Colombia, Canada, South Africa, and Tanzania.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation1
Future Growth4
Past Performance2
Financial Health3
Dividends1

Read more about these checks in the individual report sections or in our analysis model.

Reasonable growth potential with mediocre balance sheet.