AAK AB (publ.) (STO:AAK) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

AAK AB (publ.) (STO:AAK) has had a rough three months with its share price down 14%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on AAK AB (publ.)'s ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

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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 AAK AB (publ.) is:

18% = kr3.5b ÷ kr20b (Based on the trailing twelve months to December 2024).

The 'return' is the profit over the last twelve months. So, this means that for every SEK1 of its shareholder's investments, the company generates a profit of SEK0.18.

View our latest analysis for AAK AB (publ.)

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. 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 AAK AB (publ.)'s Earnings Growth And 18% ROE

To begin with, AAK AB (publ.) seems to have a respectable ROE. Especially when compared to the industry average of 9.9% the company's ROE looks pretty impressive. Probably as a result of this, AAK AB (publ.) was able to see an impressive net income growth of 21% over the last five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared AAK AB (publ.)'s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.7%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is AAK fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is AAK AB (publ.) Using Its Retained Earnings Effectively?

AAK AB (publ.) has a three-year median payout ratio of 37% (where it is retaining 63% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like AAK AB (publ.) is reinvesting its earnings efficiently.

Besides, AAK AB (publ.) has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 38%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 16%.

Summary

On the whole, we feel that AAK AB (publ.)'s performance has been quite good. 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. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts 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.