Is Koninklijke Ahold Delhaize N.V.'s(AMS:AD) Recent Stock Performance Tethered To Its Strong Fundamentals?

Koninklijke Ahold Delhaize's (AMS:AD) stock is up by a considerable 18% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Koninklijke Ahold Delhaize's ROE in this article.

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?

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 Koninklijke Ahold Delhaize is:

9.9% = €1.3b ÷ €13b (Based on the trailing twelve months to April 2021).

The 'return' refers to a company's earnings over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.10 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of Koninklijke Ahold Delhaize's Earnings Growth And 9.9% ROE

To begin with, Koninklijke Ahold Delhaize seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 11%. This probably goes some way in explaining Koninklijke Ahold Delhaize's moderate 13% growth over the past five years amongst other factors.

Next, on comparing with the industry net income growth, we found that Koninklijke Ahold Delhaize's growth is quite high when compared to the industry average growth of 7.1% in the same period, which is great to see.

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 AD? You can find out in our latest intrinsic value infographic research report.

Is Koninklijke Ahold Delhaize Making Efficient Use Of Its Profits?

Koninklijke Ahold Delhaize has a healthy combination of a moderate three-year median payout ratio of 47% (or a retention ratio of 53%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Besides, Koninklijke Ahold Delhaize has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 48% of its profits over the next three years. Regardless, the future ROE for Koninklijke Ahold Delhaize is predicted to rise to 15% despite there being not much change expected in its payout ratio.

Summary

Overall, we are quite pleased with Koninklijke Ahold Delhaize's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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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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.
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