AH-Vest Limited's (JSE:AHL) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

AH-Vest (JSE:AHL) has had a great run on the share market with its stock up by a significant 400% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to AH-Vest's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for AH-Vest

How To Calculate Return On Equity?

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 AH-Vest is:

23% = R8.1m ÷ R35m (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. That means that for every ZAR1 worth of shareholders' equity, the company generated ZAR0.23 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

AH-Vest's Earnings Growth And 23% ROE

To begin with, AH-Vest seems to have a respectable ROE. Especially when compared to the industry average of 12% the company's ROE looks pretty impressive. Probably as a result of this, AH-Vest was able to see an impressive net income growth of 36% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared AH-Vest's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 4.0% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is AH-Vest fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is AH-Vest Using Its Retained Earnings Effectively?

AH-Vest has a really low three-year median payout ratio of 10.0%, meaning that it has the remaining 90% left over to reinvest into its business. So it looks like AH-Vest is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Summary

Overall, we are quite pleased with AH-Vest's 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 substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 3 risks we have identified for AH-Vest by visiting our risks dashboard for free on our platform here.

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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.
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