Air Products and Chemicals, Inc.'s (NYSE:APD) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

With its stock down 5.0% over the past month, it is easy to disregard Air Products and Chemicals (NYSE:APD). 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. Particularly, we will be paying attention to Air Products and Chemicals' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Air Products and Chemicals

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 Air Products and Chemicals is:

21% = US$3.9b ÷ US$19b (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.21.

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. 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.

Air Products and Chemicals' Earnings Growth And 21% ROE

To start with, Air Products and Chemicals' ROE looks acceptable. Especially when compared to the industry average of 10% the company's ROE looks pretty impressive. Probably as a result of this, Air Products and Chemicals was able to see a decent growth of 12% over the last five years.

We then performed a comparison between Air Products and Chemicals' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 10% in the same 5-year period.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is APD fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Air Products and Chemicals Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 63% (or a retention ratio of 37%) for Air Products and Chemicals suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Air Products and Chemicals has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 51% of its profits over the next three years. As a result, Air Products and Chemicals' ROE is not expected to change by much either, which we inferred from the analyst estimate of 17% for future ROE.

Conclusion

Overall, we are quite pleased with Air Products and Chemicals' performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.