Alpina Holdings Limited's (Catalist:ZXY) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Alpina Holdings' (Catalist:ZXY) stock is up by a considerable 13% over the past week. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Alpina Holdings' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Alpina Holdings

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Alpina Holdings is:

7.3% = S$2.0m ÷ S$28m (Based on the trailing twelve months to December 2022).

The 'return' is the income the business earned over the last year. So, this means that for every SGD1 of its shareholder's investments, the company generates a profit of SGD0.07.

Why Is ROE Important For 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Alpina Holdings' Earnings Growth And 7.3% ROE

When you first look at it, Alpina Holdings' ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.2%. On the other hand, Alpina Holdings reported a moderate 9.1% net income growth over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

We then compared Alpina Holdings' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 7.3% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Alpina Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Alpina Holdings Efficiently Re-investing Its Profits?

Alpina Holdings' three-year median payout ratio to shareholders is 16% (implying that it retains 84% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

While Alpina Holdings has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Conclusion

On the whole, we do feel that Alpina Holdings has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 3 risks we have identified for Alpina Holdings visit our risks dashboard for free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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