Acuity Brands, Inc.'s (NYSE:AYI) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Acuity Brands (NYSE:AYI) has had a great run on the share market with its stock up by a significant 30% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Acuity Brands' 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Acuity Brands

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 Acuity Brands is:

18% = US$423m ÷ US$2.4b (Based on the trailing twelve months to August 2024).

The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.18.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Acuity Brands' Earnings Growth And 18% ROE

To start with, Acuity Brands' ROE looks acceptable. Especially when compared to the industry average of 11% the company's ROE looks pretty impressive. This probably laid the ground for Acuity Brands' moderate 8.0% net income growth seen over the past five years.

As a next step, we compared Acuity Brands' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 16% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for AYI? You can find out in our latest intrinsic value infographic research report.

Is Acuity Brands Using Its Retained Earnings Effectively?

Acuity Brands' three-year median payout ratio to shareholders is 4.6% (implying that it retains 95% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Additionally, Acuity Brands 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 4.3% of its profits over the next three years.

Summary

In total, we are pretty happy with Acuity Brands' 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 a good amount of growth in its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current 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. 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.