Will the weakness of the share of Allied Tecnologia SA (BVMF: ALLD3) prove to be temporary given the solid fundamentals?
With its share down 42% over the past three months, it’s easy to overlook Allied Tecnologia (BVMF: ALLD3). However, stock prices are usually determined by a company’s long-term financial performance, which in this case looks quite promising. In particular, we will pay particular attention to Allied Tecnologia’s ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
See our latest review for Allied Tecnologia
How to 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 Allied Tecnologia is:
24% = 349 million reais Ã· 1.5 billion reais (based on the last twelve months up to June 2021).
The “return” is the income the business has earned over the past year. This means that for every R $ 1 of equity, the company generated R $ 0.24 of profit.
What is the relationship between ROE and profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “holding back” for future growth, which then gives us an idea of ââthe growth potential of the company. 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.
Allied Tecnologia profit growth and 24% ROE
For starters, Allied Tecnologia appears to have a respectable ROE. Compared to the industry’s average ROE of 10%, the company’s ROE looks quite remarkable. This likely laid the foundation for Allied Tecnologia’s significant 40% net profit growth seen over the past five years. We believe there could be other factors at play here as well. For example, the business has a low payout ratio or is managed efficiently.
Then, comparing with the industry’s net income growth, we found that Allied Tecnologia’s growth is quite high compared to the industry’s average growth of 11% over the same period, which is great to see.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. What is ALLD3 worth today? The intrinsic value infographic in our free research report helps to visualize whether ALLD3 is currently poorly valued by the market.
Is Allied Tecnologia using its profits effectively?
Overall, we are quite happy with the performance of Allied Tecnologia. Specifically, we like the fact that the company reinvests a large portion of its profits at a high rate of return. This of course allowed the company to experience substantial growth in profits. If the company continues to grow earnings like it has, it could have a positive impact on its stock price given the influence of earnings per share on long-term stock prices. Let’s not forget that stock price results also depend on the potential risks a company may face. It is therefore important that investors are aware of the risks inherent in the business. To find out about the 3 risks we have identified for Allied Tecnologia, visit our free risk dashboard.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. 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 material. Simply Wall St has no position in the mentioned stocks.
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