Apex Frozen Foods (NSE: APEX) stock has risen 12% over the past month. We wonder if and what role company financials are playing in this price change, as a company’s long-term fundamentals usually dictate market outcomes. Specifically, we decided to study the ROE of Apex Frozen Foods in this article.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest review for Apex Frozen Foods
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for Apex Frozen Foods is:
11% = â¹ 451m Ã· â¹ 4.3b (Based on the last twelve months up to December 2020).
The “return” is the profit of the last twelve months. One way to conceptualize this is that for every 1 of share capital it has, the company has made â¹ 0.11 in profit.
Why is ROE important for profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. We now need to assess the profits that the business is reinvesting or âwithholdingâ for future growth, which then gives us an idea of ââthe growth potential of the business. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of Apex Frozen Foods profit growth and 11% ROE
At first glance, Apex Frozen Foods’ ROE doesn’t look very promising. However, given that the company’s ROE is similar to the industry average ROE of 11%, we can think about it. Despite this, Apex Frozen Foods posted fairly decent net profit growth which grew at a rate of 7.3%. Considering the moderately low ROE, it is quite possible that other aspects positively influence the company’s profit growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout rate.
As a next step, we compared the net income growth of Apex Frozen Foods with the industry and were disappointed to see that the company’s growth is below the industry average growth of 16% over the course of the same period.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This will help them determine whether the future of the stock looks bright or threatening. Is Apex Frozen Foods valued enough compared to other companies? These 3 evaluation measures could help you decide.
Is Apex Frozen Foods Efficiently Reinvesting Its Profits?
Apex Frozen Foods’ three-year median payout ratio to shareholders is 8.7% (implying that it keeps 91% of its revenue), which is lower, so it looks like management is reinvesting massively benefits to develop its activity.
In addition, Apex Frozen Foods is committed to continuing to share its profits with its shareholders, which we can deduce from its long history of three years of paying dividends.
Overall, we think Apex Frozen Foods certainly has some positive factors to consider. That is, decent profit growth supported by a high reinvestment rate. However, we believe that this profit growth could have been higher if the company had improved thanks to the low ROE rate. Especially considering the way the company reinvests a huge chunk of its profits. While we don’t completely reject the business, what we would do is try to determine how risky the business is in order to make a more informed decision about the business. To learn about the 2 risks we have identified for Apex Frozen Foods, visit our free risk dashboard.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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