Is Alpha Financial Markets Consulting plc's (LON:AFM) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Alpha Financial Markets Consulting's (LON:AFM) stock is up by a considerable 16% over the past three months. 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. Specifically, we decided to study Alpha Financial Markets Consulting's ROE in this article.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Alpha Financial Markets Consulting

How Do You 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 Alpha Financial Markets Consulting is:

5.8% = UK£5.6m ÷ UK£95m (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every £1 worth of shareholders' equity, the company generated £0.06 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. 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.

Alpha Financial Markets Consulting's Earnings Growth And 5.8% ROE

On the face of it, Alpha Financial Markets Consulting's ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 13% either. In spite of this, Alpha Financial Markets Consulting was able to grow its net income considerably, at a rate of 60% in the last five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Alpha Financial Markets Consulting's growth is quite high when compared to the industry average growth of 10% in the same period, which is great to see.

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. Has the market priced in the future outlook for AFM? You can find out in our latest intrinsic value infographic research report.

Is Alpha Financial Markets Consulting Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 66% (implying that it keeps only 34% of profits) for Alpha Financial Markets Consulting suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Moreover, Alpha Financial Markets Consulting is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 49% over the next three years. As a result, the expected drop in Alpha Financial Markets Consulting's payout ratio explains the anticipated rise in the company's future ROE to 17%, over the same period.

Conclusion

On the whole, we do feel that Alpha Financial Markets Consulting has some positive attributes. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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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