Alpha Astika Akinita S.A.'s (ATH:ASTAK) Stock's Been Going Strong: Could Weak Financials Mean The Market Will Correct Its Share Price?

Most readers would already be aware that Alpha Astika Akinita's (ATH:ASTAK) stock increased significantly by 42% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Particularly, we will be paying attention to Alpha Astika Akinita'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 Alpha Astika Akinita

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 Alpha Astika Akinita is:

2.1% = €2.0m ÷ €99m (Based on the trailing twelve months to June 2023).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.02 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

Alpha Astika Akinita's Earnings Growth And 2.1% ROE

As you can see, Alpha Astika Akinita's ROE looks pretty weak. Not just that, even compared to the industry average of 3.4%, the company's ROE is entirely unremarkable. Therefore, Alpha Astika Akinita's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Alpha Astika Akinita's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 11% in the same period.

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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Alpha Astika Akinita's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Alpha Astika Akinita Using Its Retained Earnings Effectively?

Alpha Astika Akinita has a very high three-year median payout ratio of 22,176% over the last last three years, which suggests that the company is dipping into more than just its earnings to pay its dividend. The absence of growth in Alpha Astika Akinita's earnings therefore, doesn't come as a surprise. Paying a dividend higher than reported profits is not a sustainable move. That's a huge risk in our books. Our risks dashboard should have the 2 risks we have identified for Alpha Astika Akinita.

Additionally, Alpha Astika Akinita started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth.

Summary

Overall, we would be extremely cautious before making any decision on Alpha Astika Akinita. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Alpha Astika Akinita's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.