Angling Direct PLC (LON:ANG) The stock has fallen but the fundamentals look good: will the market correct the stock price going forward?
With its stock down 29% in the past three months, it’s easy to overlook Angling Direct (LON:ANG). But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In particular, we’ll be paying close attention to Angling Direct’s ROE today.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simple terms, it is used to assess the profitability of a company in relation to its equity.
Check out our latest analysis for Angling Direct
How do you 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 Angling Direct is:
8.4% = £3.1m ÷ £36m (based on trailing 12 months to January 2022).
The “yield” is the profit of the last twelve months. Another way to think about this is that for every £1 of equity, the company was able to make a profit of £0.08.
What does ROE have to do with earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. 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. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
Angling Direct 8.4% earnings growth and ROE
At first glance, Angling Direct’s ROE isn’t much to tell. A quick closer look shows that the company’s ROE also doesn’t compare favorably to the industry average of 21%. Despite this, surprisingly, Angling Direct has experienced an exceptional net income growth of 54% over the past five years. Therefore, there could be other reasons behind this growth. Such as – high revenue retention or effective management in place.
Then, comparing with the industry net income growth, we found that Angling Direct’s growth is quite high compared to the average industry growth of 4.8% over the same period, which which is great to see.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. If you’re wondering about Angling Direct’s valuation, check out this indicator of its price-earnings ratio, relative to its industry.
Does Angling Direct use its profits effectively?
Angling Direct currently pays no dividends, which essentially means that it has reinvested all of its profits back into the business. This certainly contributes to the high earnings growth number we discussed above.
Overall, we feel that Angling Direct has positive attributes. Despite its low rate of return, the fact that the company reinvests a very large portion of its profits back into its business no doubt contributed to the strong growth in its profits. While we wouldn’t completely dismiss the business, what we would do is try to figure out how risky the business is to make a more informed decision about the business. To see the 2 risks we have identified for Angling Direct visit our free Risk Dashboard.
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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.