It is hard to get excited after looking at Alexander & Baldwin's (NYSE:ALEX) recent performance, when its stock has declined 8.8% over the past three months. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Alexander & Baldwin's ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Check out our latest analysis for Alexander & Baldwin
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Alexander & Baldwin is:
4.1% = US$42m ÷ US$1.0b (Based on the trailing twelve months to June 2023).
The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.04 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
Alexander & Baldwin's Earnings Growth And 4.1% ROE
It is quite clear that Alexander & Baldwin's ROE is rather low. Even when compared to the industry average of 5.8%, the ROE figure is pretty disappointing. Alexander & Baldwin was still able to see a decent net income growth of 5.2% over the past 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 with the industry net income growth, we found that Alexander & Baldwin's reported growth was lower than the industry growth of 18% over the last few years, which is not something we like to see.
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 ALEX worth today? The intrinsic value infographic in our free research report helps visualize whether ALEX is currently mispriced by the market.
Is Alexander & Baldwin Making Efficient Use Of Its Profits?
Alexander & Baldwin has a high three-year median payout ratio of 56%. This means that it has only 44% of its income left to reinvest into its business. However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. Despite this, the company's earnings grew moderately as we saw above.
Besides, Alexander & Baldwin has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.
Overall, we have mixed feelings about Alexander & Baldwin. While the company has posted a decent earnings growth, We do feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings at a higher rate of return. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.