Could The Market Be Wrong About AAK AB (publ.) (STO:AAK) Given Its Attractive Financial Prospects?

By
Simply Wall St
Published
November 01, 2021
OM:AAK
Source: Shutterstock

With its stock down 11% over the past three months, it is easy to disregard AAK AB (publ.) (STO:AAK). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on AAK AB (publ.)'s ROE.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for AAK AB (publ.)

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 AAK AB (publ.) is:

13% = kr1.4b ÷ kr11b (Based on the trailing twelve months to September 2021).

The 'return' is the amount earned after tax over the last twelve months. That means that for every SEK1 worth of shareholders' equity, the company generated SEK0.13 in profit.

What Has ROE Got To Do With 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.

AAK AB (publ.)'s Earnings Growth And 13% ROE

To begin with, AAK AB (publ.) seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 10%. This probably laid the ground for AAK AB (publ.)'s moderate 8.4% net income growth seen over the past five years.

As a next step, we compared AAK AB (publ.)'s net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 11% in the same period.

past-earnings-growth
OM:AAK Past Earnings Growth November 2nd 2021

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for AAK? You can find out in our latest intrinsic value infographic research report.

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

AAK AB (publ.) has a healthy combination of a moderate three-year median payout ratio of 36% (or a retention ratio of 64%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, AAK 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 36%. However, AAK AB (publ.)'s ROE is predicted to rise to 17% despite there being no anticipated change in its payout ratio.

Conclusion

On the whole, we feel that AAK AB (publ.)'s performance has been quite good. 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 a good amount of growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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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