Altra Industrial Motion Corp.'s (NASDAQ:AIMC) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

By
Simply Wall St
Published
July 01, 2021
NasdaqGS:AIMC
Source: Shutterstock

Most readers would already be aware that Altra Industrial Motion's (NASDAQ:AIMC) stock increased significantly by 14% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Altra Industrial Motion'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Altra Industrial Motion

How To Calculate Return On Equity?

ROE 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 Altra Industrial Motion is:

6.5% = US$130m ÷ US$2.0b (Based on the trailing twelve months to March 2021).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.07 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. 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. 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 Altra Industrial Motion's Earnings Growth And 6.5% ROE

When you first look at it, Altra Industrial Motion's ROE doesn't look that attractive. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 11%. Hence, the flat earnings seen by Altra Industrial Motion over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that Altra Industrial Motion's reported growth was lower than the industry growth of 7.8% in the same period, which is not something we like to see.

past-earnings-growth
NasdaqGS:AIMC Past Earnings Growth July 1st 2021

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. What is AIMC worth today? The intrinsic value infographic in our free research report helps visualize whether AIMC is currently mispriced by the market.

Is Altra Industrial Motion Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 37% (implying that the company keeps 63% of its income) over the last three years, Altra Industrial Motion has seen a negligible amount of growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Altra Industrial Motion has paid dividends over a period of nine years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 8.1% over the next three years.

Conclusion

On the whole, we feel that the performance shown by Altra Industrial Motion can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.

If you decide to trade Altra Industrial Motion, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted


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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020


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

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.


Simply Wall St character - Warren

Simply Wall St

Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.