Public Joint Stock Company ALROSA's (MCX:ALRS) Stock's Been Going Strong: Could Weak Financials Mean The Market Will Coorect Its Share Price?

Most readers would already be aware that ALROSA's (MCX:ALRS) stock increased significantly by 37% 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 ALROSA'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 ALROSA

How Is ROE Calculated?

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 ALROSA is:

9.2% = ₽23b ÷ ₽245b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every RUB1 worth of equity, the company was able to earn RUB0.09 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

ALROSA's Earnings Growth And 9.2% ROE

It is hard to argue that ALROSA's ROE is much good in and of itself. An industry comparison shows that the company's ROE is not much different from the industry average of 9.0% either. Given the low ROE ALROSA's five year net income decline of 5.4% is not surprising.

However, when we compared ALROSA's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 3.2% in the same period. This is quite worrisome.

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 ALROSA fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is ALROSA Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 83% (implying that 17% of the profits are retained), most of ALROSA's profits are being paid to shareholders, which explains the company's shrinking earnings. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. Our risks dashboard should have the 4 risks we have identified for ALROSA.

Additionally, ALROSA has paid dividends over a period of nine years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 109% over the next three years. However, ALROSA's future ROE is expected to rise to 32% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Conclusion

Overall, we would be extremely cautious before making any decision on ALROSA. As a result of its low ROE and lack of mich reinvestment into the business, the company has seen a disappointing earnings growth rate. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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. 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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