Declining Stock and Decent Financials: Is The Market Wrong About Aurizon Holdings Limited (ASX:AZJ)?

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Aurizon Holdings (ASX:AZJ) has had a rough three months with its share price down 10%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Aurizon Holdings’ ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

See our latest analysis for Aurizon Holdings

How Is ROE Calculated?

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 Aurizon Holdings is:

13% = AU$529m ÷ AU$4.1b (Based on the trailing twelve months to December 2020).

The ‘return’ is the profit over the last twelve months. That means that for every A$1 worth of shareholders’ equity, the company generated A$0.13 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.

Aurizon Holdings’ Earnings Growth And 13% ROE

To begin with, Aurizon Holdings seems to have a respectable ROE. Further, the company’s ROE compares quite favorably to the industry average of 7.3%. This certainly adds some context to Aurizon Holdings’ exceptional 32% net income growth seen over the past five years. However, there could also be other causes behind this growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Aurizon Holdings’ growth is quite high when compared to the industry average growth of 4.8% in the same period, which is great to see.

past-earnings-growth

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. What is AZJ worth today? The intrinsic value infographic in our free research report helps visualize whether AZJ is currently mispriced by the market.

Is Aurizon Holdings Making Efficient Use Of Its Profits?

Aurizon Holdings has a significant three-year median payout ratio of 97%, meaning the company only retains 3.0% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Additionally, Aurizon Holdings has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 98% of its profits over the next three years. As a result, Aurizon Holdings’ ROE is not expected to change by much either, which we inferred from the analyst estimate of 15% for future ROE.

Conclusion

In total, it does look like Aurizon Holdings has some positive aspects to its business. Especially the growth in earnings which was backed by an impressive ROE. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be negligible. 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.

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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