Can mixed financials negatively impact the current pricing dynamics of ABM Industries Incorporated (NYSE: ABM)?
Most readers already know that stock of ABM Industries (NYSE: ABM) rose 2.4% in the past month. Given that stock prices typically follow long-term business performance, we wonder if the company’s mixed financial results could have a negative effect on its current price movement. In this article, we have decided to focus on the ROE of ABM Industries.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
Check out our latest analysis for ABM Industries
How is the ROE calculated?
The formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of ABM Industries is:
9.2% = US $ 145 million ÷ US $ 1.6 billion (based on the last twelve months to July 2021).
The “return” is the income the business has earned over the past year. Another way to look at this is that for every dollar in equity, the company was able to make $ 0.09 in profit.
What does ROE have to do with 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.
ABM Industries profit growth and 9.2% ROE
At first glance, ABM Industries’ ROE is not much to say. However, given that the company’s ROE is similar to the industry average ROE of 10%, we can think about it a bit. We can see that ABM Industries grew at an average five-year net profit growth rate of 3.4%, which is a bit lower. Keep in mind that the company’s ROE is not that high. Therefore, this provides some context for the weak earnings growth observed by the company.
We then compared ABM Industries’ net income growth with that of the industry and found that the company’s growth figure is lower than the industry average growth rate of 8.9% over the course of the same period, which is a bit worrying.
Profit growth is an important metric to consider when valuing a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps him determine whether the stock is set for a bright or dark future. Has the market taken into account ABM’s future prospects? You can find out in our latest Intrinsic Value infographic research report.
Is ABM Industries Efficiently Using Its Retained Earnings?
Despite a moderate three-year median payout ratio of 48% (which implies the company keeps the remaining 52% of its revenue), earnings growth for ABM Industries has been quite weak. Therefore, there could be other reasons for the lack in this regard. For example, the business could be in decline.
Additionally, ABM Industries has paid dividends over a period of at least ten years, suggesting that sustaining dividend payments is much more important to management, even if it comes at the expense of business growth. business.
All in all, we are a little ambivalent about the performance of ABM Industries. Even though it appears to be keeping the bulk of its profits, given the low ROE, investors might not benefit from all this reinvestment after all. The weak earnings growth suggests that our theory is correct. That said, looking at current analysts’ estimates, we found that the company’s earnings are expected to accelerate. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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 the mentioned stocks.
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