Is AVTECH Sweden AB (publ)’s (STO:AVT B) stock’s recent performance driven by its attractive financial outlook?
AVTECH Sweden (STO:AVT B) has had a big jump in the stock market with its stock up a significant 29% over the past three months. Given the company’s impressive performance, we decided to study its financial indicators more closely because a company’s long-term financial health usually dictates market performance. Specifically, we decided to study AVTECH Sweden’s ROE in this article.
Return on Equity or ROE is a test of how efficiently a company increases its value and manages investors’ money. Simply put, it is used to assess a company’s profitability in relation to its equity capital.
See our latest analysis for AVTECH Sweden
How is ROE calculated?
Return on equity can be calculated by using the formula:
Return on equity = Net profit (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for AVTECH Sweden is:
8.8% = SEK 2.4 million ÷ SEK 27 million (Based on the last twelve months to June 2022).
The “return” is the annual profit. One way to conceptualize this is that for every SEK 1 of the shareholders’ capital the company has made SEK 0.09 in profit.
What does ROE have to do with earnings growth?
So far we have learned that ROE measures how efficiently a company generates its profits. Based on how much of its profit the company chooses to reinvest or “keep”, we can then evaluate a company’s future ability to generate profit. Assuming all else remains constant, the higher the return on equity and retained earnings, the higher the growth rate of a firm compared to firms that do not necessarily possess these characteristics.
AVTECH Sweden’s profit growth and 8.8% ROE
At first glance, AVTECH Sweden appears to have a decent ROE. Additionally, the company’s ROE is similar to the industry average of 7.7%. Consequently, this likely laid the foundation for the impressive 35% net income growth that AVTECH Sweden has seen over the past five years. We believe that there may also be other aspects that positively affect the company’s profit growth. For example, the company has a low payout ratio or is managed efficiently.
When we then compared to the industry’s net income growth, we found that AVTECH Sweden’s growth is quite high compared to the average industry growth of 20% during the same period, which is amazing to see.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing so, they will get an idea of whether the stock is heading into clear blue water or if swampy waters await. Is AVTECH Sweden fairly valued compared to other companies? These three metrics can help you decide.
Does AVTECH Sweden effectively reinvest its profits?
AVTECH Sweden currently does not pay a dividend, which essentially means that it has reinvested all its profit in the business. This definitely contributes to the high profit growth we discussed above.
Summary
Overall, we are quite satisfied with AVTECH Sweden’s performance. In particular, we like that the company reinvests heavily in its operations and with high returns. Unsurprisingly, this has led to impressive earnings growth. When we studied current analyst estimates, we found that analysts expect the company to continue its recent streak of growth. Are these analysts’ expectations based on the broad expectations of the industry, or on the company’s fundamentals? Click here to go to our analyst forecast 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 by 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 shares and does not take into account your goals or your financial situation. We strive to provide you with long-term focused analysis driven by fundamental data. Note that our analysis may not take into account recent price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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