Does The Market Have A Low Tolerance For Animalcare Group plc's (LON:ANCR) Mixed Fundamentals?

Animalcare Group (LON:ANCR) has had a rough three months with its share price down 27%. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Animalcare Group's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

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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 Animalcare Group is:

4.3% = UK£4.8m ÷ UK£113m (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.04 in profit.

View our latest analysis for Animalcare Group

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Animalcare Group's Earnings Growth And 4.3% ROE

As you can see, Animalcare Group's ROE looks pretty weak. Even compared to the average industry ROE of 15%, the company's ROE is quite dismal. However, we we're pleasantly surprised to see that Animalcare Group grew its net income at a significant rate of 60% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Animalcare Group's growth is quite high when compared to the industry average growth of 0.9% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 ANCR? You can find out in our latest intrinsic value infographic research report.

Is Animalcare Group Making Efficient Use Of Its Profits?

Animalcare Group's very high three-year median payout ratio of 133% suggests that the company is paying more to its shareholders than what it is earning. Despite this, the company's earnings grew significantly as we saw above. Having said that, the high payout ratio is definitely risky and something to keep an eye on. Our risks dashboard should have the 2 risks we have identified for Animalcare Group.

Moreover, Animalcare Group is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 34% over the next three years.

Conclusion

In total, we're a bit ambivalent about Animalcare Group's performance. While no doubt its earnings growth is pretty substantial, its ROE and earnings retention is quite poor. So while the company has managed to grow its earnings in spite of this, we are unconvinced if this growth could extend, especially during troubled times. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Animalcare Group's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.