Aussie Broadband Inc (ASX:ABB) has had a strong run in the equity market, with its stock rising 25% in the past three months. However, we wonder if the company’s inconsistent financial statements would negatively impact the current share price dynamics. In particular, we’ll be paying attention to Aussie Broadband’s ROE today.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest review for Aussie Broadband
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Aussie Broadband is:
3.9% = AU$7.4 million ÷ AU$191 million (based on trailing twelve months to December 2021).
“Yield” is the income the business has earned over the past year. Another way to think about this is that for every 1 Australian dollar of equity, the company was able to make a profit of 0.04 Australian dollars.
What does ROE have to do with earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
Aussie Broadband earnings growth and ROE of 3.9%
At first glance, Aussie Broadband’s ROE does not look very promising. However, since the company’s ROE is similar to the industry average ROE of 3.9%, we can spare it some thought. But again, Aussie Broadband’s five-year net income was down 6.8%. Keep in mind that the company has a slightly low ROE. Therefore, lower revenue could also be the result.
That being said, we benchmarked Aussie Broadband’s performance against the industry and became concerned when we found that while the company had cut profits, the industry had increased profits at a rate of 26% over the course of the same period.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. Is ABB correctly valued? This intrinsic business value infographic has everything you need to know.
Does Aussie Broadband Use Retained Earnings Effectively?
Aussie Broadband pays no dividends, which means the company keeps all of its profits, which makes us wonder why it keeps its profits if it can’t use them to grow its business. It seems that there could be other reasons for the lack in this regard. For example, the business might be in decline.
All in all, we’re a bit ambivalent about Aussie Broadband’s performance. Although the company has a high reinvestment rate, the low ROE means that all this reinvestment does not benefit its investors and, moreover, it has a negative impact on earnings growth. That said, looking at current analyst estimates, we found that the company’s earnings growth rate should see a huge improvement. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.