Does the weak fundamentals of Altus Group Limited (TSE: AIF) mean that the market could correct its share price?

Altus Group (TSE: AIF) has performed well in the equity market with a significant increase in its share of 16% over the past three months. However, in this article, we have decided to focus on its weak fundamentals, as a company’s long-term financial performance is what ultimately dictates market performance. More specifically, we have decided to study the ROE of the Altus Group in this article.

Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.

Consult our latest analysis for the Altus Group

How to calculate return on equity?

The return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

Thus, on the basis of the above formula, the ROE of the Altus Group is:

8.1% = C $ 33 million ÷ C $ 407 million (based on the last twelve months to June 2021).

The “return” is the amount earned after tax over the past twelve months. This means that for every C $ 1 of equity, the company generated C $ 0.08 in profit.

Why is ROE important for profit growth?

We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.

8.1% profit growth and ROE of the Altus Group

At first glance, the Altus Group’s ROE does not seem very promising. We then compared the company’s ROE to that of the industry as a whole and were disappointed to find that the ROE is 11% below the industry average. Therefore, it may not be wrong to say that the 18% drop in five-year net profit observed by Altus Group is likely the result of lower ROE. We believe there could be other factors at play here as well. Such as – low profit retention or misallocation of capital.

That being said, we compared the performance of the Altus Group with that of the industry and became concerned when we found that although the company reduced its profits, the industry increased its profits at a rate of. 11% over the same period.

TSX: AIF Past Earnings Growth September 4, 2021

Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This will help them determine whether the future of the stock looks bright or threatening. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if Altus Group is trading high P / E or low P / E, relative to its industry.

Is the Altus Group effectively reinvesting its profits?

With a high three-year median payout rate of 89% (implying that 11% of profits are retained), most of Altus Group’s profits go to shareholders, which explains the company’s declining profits. With only a little money reinvested in the business, earnings growth would obviously be little or no. Our risk dashboard must include the 3 risks that we have identified for the Altus Group.

Additionally, Altus Group pays dividends over a period of at least ten years, which suggests that sustaining dividend payments is much more important to management, even if it comes at the expense of growing the business. . After studying the latest consensus data from analysts, we found that the company’s future payout ratio is expected to drop to 25% over the next three years. The fact that the company’s ROE is expected to increase to 21% over the same period is explained by the lower payout ratio.

Conclusion

All in all, we would have thought carefully before deciding on any investment action concerning the Altus Group. Because the company does not reinvest much in the business and given the low ROE, it is not surprising that there is no or no growth in its earnings. However, the latest forecast from industry analysts shows that analysts expect a significant improvement in the company’s earnings growth rate. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.

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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 documents. Simply Wall St has no position in any of the stocks mentioned.
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About Clara Barnard

Clara Barnard

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