Do Fundamentals Have Any Role To Play In Driving Acrow Formwork and Construction Services Limited's (ASX:ACF) Stock Up Recently?

Most readers would already know that Acrow Formwork and Construction Services' (ASX:ACF) stock increased by 5.7% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. In this article, we decided to focus on Acrow Formwork and Construction Services' ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Acrow Formwork and Construction Services

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Acrow Formwork and Construction Services is:

6.4% = AU$4.0m ÷ AU$61m (Based on the trailing twelve months to June 2021).

The 'return' is the profit over the last twelve months. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.06.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Acrow Formwork and Construction Services' Earnings Growth And 6.4% ROE

When you first look at it, Acrow Formwork and Construction Services' ROE doesn't look that attractive. Next, when compared to the average industry ROE of 8.2%, the company's ROE leaves us feeling even less enthusiastic. In spite of this, Acrow Formwork and Construction Services was able to grow its net income considerably, at a rate of 24% in the last five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

Next, on comparing Acrow Formwork and Construction Services' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 27% in the same period.

Earnings growth is a huge factor in stock valuation. 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. What is ACF worth today? The intrinsic value infographic in our free research report helps visualize whether ACF is currently mispriced by the market.

Is Acrow Formwork and Construction Services Making Efficient Use Of Its Profits?

Acrow Formwork and Construction Services has a significant three-year median payout ratio of 70%, meaning the company only retains 30% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Moreover, Acrow Formwork and Construction Services is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 44% over the next three years. The fact that the company's ROE is expected to rise to 17% over the same period is explained by the drop in the payout ratio.

Conclusion

In total, it does look like Acrow Formwork and Construction Services has some positive aspects to its business. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.