It’s easy to ignore Kaap Agri (JSE:KAL) as its share price has fallen 6.9% over the past month. But if you look closely, you might find that the key financial metrics look pretty decent. This could mean that stocks could rise in the long term, given how markets typically reward more resilient long-term fundamentals. In this article, I chose to focus on his ROE of Kaap Agri.
Return on equity or ROE is an important factor for shareholders to consider as it indicates how effectively capital is being reinvested. In other words, it is a rate of return that measures the rate of return on capital provided by the company’s shareholders.
See the latest analysis from Kaap Agri
ROE calculation method
ROE can be calculated using the following formula:
Return on Equity = Net Income (from Continuing Operations) ÷ Shareholders’ Equity
Therefore, based on the above formula, Kaap Agri’s ROE would be:
15% = R413m ÷ R2.8b (based on last 12 months to September 2022).
“Return” refers to the company’s earnings for the last year. So for ZAR1 worth of shareholders’ equity, the company generated a profit of his ZAR0.15.
What is the relationship between ROE and profit growth?
So far we have learned that ROE is a measure of a company’s profitability. Based on the amount of profits the company chooses to reinvest or “retain”, the company’s ability to generate profits in the future can be assessed. Generally speaking, other things being equal, companies with high return on equity and earnings retention will have higher growth rates than companies that do not share these attributes.
Side-by-side comparison of Kaap Agri revenue growth and 15% ROE
At first glance, Kaap Agri’s ROE doesn’t look all that attractive. Second, the company’s ROE is even more demoralizing when compared to the industry average of his ROE of 22%. Kaap Agri was still able to see a decent net profit growth of 9.8% over the last five years. Therefore, the company’s earnings growth could possibly have been driven by other variables. For example, the company’s dividend payout ratio is low, or it is managed efficiently.
Next, when compared to the industry’s net profit growth rate, we found that Kaap Agri’s growth rate was very high when compared to the industry average growth rate of 5.1% over the same period. This is great.
Earnings growth is a big factor in stock valuations. It is important for investors to know whether the market is pricing in a company’s expected earnings growth (or decline). Doing so will help establish whether the stock’s future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio. This determines the price the market is willing to pay for a stock based on its earnings prospects. Therefore, it is advisable to check whether Kaap Agri trades at a high or low P/E relative to its industry.
Is Kaap Agri reinvesting profits efficiently?
With a three-year median payout ratio of 30% (meaning the company retains 70% of its profits), Kaap Agri pays out well as it sees a sizeable amount of growth in earnings It seems that you are effectively reinvesting in a way. covered.
In addition, Kaap Agri has paid dividends over five years. This means the company is serious about sharing profits with its shareholders.
overview
Overall, we feel that Kaap Agri has some positive attributes. Despite its high reinvestment rate and low ROE, the company has achieved significant revenue growth. I’m not going to dismiss the company outright, but I’m trying to see how risky it is to make a more informed decision about it. For the two risks we have identified for Kaap Agri: risk dashboard Free on this platform.
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This article by Simply Wall St is general in nature. We provide comments based on historical data and analyst projections using only unbiased methodologies and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. We aim to deliver long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price sensitive company announcements or qualitative materials. Is not …
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