Could The Market Be Wrong About Koninklijke Ahold Delhaize N.V. (AMS:AD) Given Its Attractive Financial Prospects?

With its stock down 9.4% over the past month, it is easy to disregard Koninklijke Ahold Delhaize (AMS:AD). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Koninklijke Ahold Delhaize'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Koninklijke Ahold Delhaize

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Koninklijke Ahold Delhaize is:

11% = €1.4b ÷ €12b (Based on the trailing twelve months to January 2021).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.11 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Koninklijke Ahold Delhaize's Earnings Growth And 11% ROE

To start with, Koninklijke Ahold Delhaize's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 9.8%. This probably goes some way in explaining Koninklijke Ahold Delhaize's moderate 17% growth over the past five years amongst other factors.

We then compared Koninklijke Ahold Delhaize's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 6.8% in the same period.

Earnings growth is a huge factor in stock valuation. 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. What is AD worth today? The intrinsic value infographic in our free research report helps visualize whether AD is currently mispriced by the market.

Is Koninklijke Ahold Delhaize Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 45% (implying that the company retains 55% of its profits), it seems that Koninklijke Ahold Delhaize is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, Koninklijke Ahold Delhaize has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 47%. However, Koninklijke Ahold Delhaize's ROE is predicted to rise to 14% despite there being no anticipated change in its payout ratio.

Conclusion

In total, we are pretty happy with Koninklijke Ahold Delhaize's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. 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.

When trading Koninklijke Ahold Delhaize or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.