Should Appen Limited (ASX: APX) stock weakness be taken as a sign that the market will correct the share price given decent financial data?

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With its stock down 35% in the past three months, it’s easy to overlook Appen (ASX: APX). But if you pay close attention to it, you might find that its key financial metrics look pretty decent, which could mean the stock could potentially rise in the long term given how markets typically reward long-term fundamentals. more resistant term. Specifically, we decided to study Appen’s ROE 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.

See our latest review for Appen

How do you calculate return on equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Appen is:

8.0% = US $ 30 million ÷ US $ 373 million (based on the last twelve months to June 2021).

“Return” refers to a company’s profits over the past year. One way to conceptualize this is that for every Australian dollar of share capital it has, the company has made a profit of AU $ 0.08.

Why is ROE important for profit growth?

So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of Appen’s 8.0% profit growth and ROE

At first glance, Appen’s ROE isn’t much to say. Still, further study shows that the company’s ROE is similar to the industry average of 8.0%. In particular, the exceptional 29% net profit growth recorded by Appen over the past five years is quite remarkable. Given the slightly low ROE, it is likely that other aspects are behind this growth. Such as – high profit retention or effective management in place.

Next, comparing with the industry’s net income growth, we found that Appen’s growth is quite high compared to the industry’s average growth of 14% over the same period, which is great to see.

ASX: APX Past Profit Growth September 29, 2021

The basis for attaching value to a business is, to a large extent, related to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. In doing so, he will have an idea if the action is heading towards clear blue waters or swampy waters ahead. Is the APX valued enough? This intrinsic business value infographic has everything you need to know.

Is Appen Efficiently Reinvesting Its Profits?

Appen’s three-year median payout ratio is less than 24%, which means it keeps a higher percentage (76%) of its profits. So it appears that Appen is reinvesting its profits massively to grow its business, which is reflected in its profit growth.

In addition, Appen is committed to continuing to share its profits with its shareholders, which we can deduce from its long history of six years of paying dividends. After studying the latest consensus data from analysts, we found that the company is expected to continue to pay out around 24% of its profits over the next three years. However, Appen’s ROE is expected to increase to 11% although there is no expected change in its payout ratio.

Summary

Overall, we think Appen definitely has some positive factors to consider. Despite its low rate of return, the fact that the company reinvested a very large portion of its profits back into its business has undoubtedly contributed to the strong profit growth. That said, the latest forecast from industry analysts shows that the company’s earnings growth is expected to slow. 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 material. Simply Wall St has no position in any of the stocks mentioned.

Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.

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