Yahoo Finance Are AstroNova, Inc.'s (NASDAQ:ALOT) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?
It is hard to get excited after looking at AstroNova's (NASDAQ:ALOT) recent performance, when its stock has declined 15% over the past three months. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Specifically, we decided to study AstroNova's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for AstroNova
How To Calculate Return On Equity?
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 AstroNova is:
5.5% = US$5.0m ÷ US$91m (Based on the trailing twelve months to April 2024).
The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.06.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
AstroNova's Earnings Growth And 5.5% ROE
When you first look at it, AstroNova's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 8.3% either. Therefore, AstroNova's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.
As a next step, we compared AstroNova's net income growth with the industry and discovered that the industry saw an average growth of 29% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about AstroNova's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is AstroNova Efficiently Re-investing Its Profits?
AstroNova doesn't pay any regular dividends, meaning that potentially all of its profits are being reinvested in the business. However, this doesn't explain why the company hasn't seen any growth. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Summary
On the whole, we feel that the performance shown by AstroNova can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into AstroNova's past profit growth, check out this visualization of past earnings, revenue and cash flows.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com