Is Addtech AB (publ.)'s (STO:ADDT B) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Addtech AB (publ.)'s (STO:ADDT B) stock is up by a considerable 45% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Addtech AB (publ.)'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Addtech AB (publ.)

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 Addtech AB (publ.) is:

26% = kr1.8b ÷ kr6.9b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every SEK1 worth of equity, the company was able to earn SEK0.26 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. 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. 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.

A Side By Side comparison of Addtech AB (publ.)'s Earnings Growth And 26% ROE

To begin with, Addtech AB (publ.) has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 14% also doesn't go unnoticed by us. So, the substantial 20% net income growth seen by Addtech AB (publ.) over the past five years isn't overly surprising.

We then performed a comparison between Addtech AB (publ.)'s net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 20% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Addtech AB (publ.) is trading on a high P/E or a low P/E, relative to its industry.

Is Addtech AB (publ.) Efficiently Re-investing Its Profits?

The three-year median payout ratio for Addtech AB (publ.) is 42%, which is moderately low. The company is retaining the remaining 58%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Addtech AB (publ.) is reinvesting its earnings efficiently.

Additionally, Addtech AB (publ.) 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 42%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 27%.

Conclusion

In total, we are pretty happy with Addtech AB (publ.)'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. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.

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