Will Weakness in Avance Gas Holding Ltd's (OB:AGAS) Stock Prove Temporary Given Strong Fundamentals?

With its stock down 37% over the past three months, it is easy to disregard Avance Gas Holding (OB:AGAS). 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 Avance Gas Holding'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Avance Gas Holding

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Avance Gas Holding is:

38% = US$274m ÷ US$711m (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each NOK1 of shareholders' capital it has, the company made NOK0.38 in profit.

What Has ROE Got To Do With 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.

A Side By Side comparison of Avance Gas Holding's Earnings Growth And 38% ROE

To begin with, Avance Gas Holding has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 22% which is quite remarkable. So, the substantial 39% net income growth seen by Avance Gas Holding over the past five years isn't overly surprising.

As a next step, we compared Avance Gas Holding's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 35% in the same period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Avance Gas Holding fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Avance Gas Holding Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 74% (implying that it keeps only 26% of profits) for Avance Gas Holding suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Additionally, Avance Gas Holding 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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 94% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 19%) over the same period.

Summary

In total, we are pretty happy with Avance Gas Holding's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.