Is Ampco-Pittsburgh Company (NYSE: AP )’s current inventory efficiency a mirrored image of your monetary well being?
Ampco-Pittsburgh (NYSE: AP) has seen its stock market surge over the past three months. The share rose a respectable 49%. Since the market typically pays for a company’s long-term fundamentals, we decided to examine the company’s key performance indicators to see if they could affect the market. In particular, we decided to examine the Ampco-Pittsburgh ROE in this article.
Return on Equity, or ROE, is a test of how effectively a company is increasing its value and managing investors’ money. In other words, it shows the company’s success in converting shareholder investments into profits.
Check out our latest analysis for Ampco-Pittsburgh
How to calculate the return on equity
The Formula for the return on equity is:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So based on the formula above, the ROE for Ampco-Pittsburgh is:
12% = $ 10 million ÷ $ 86 million (based on the last twelve months through September 2020).
“Return” refers to a company’s earnings over the past year. This means that for every $ 1 of its shareholders’ investment, the company makes a profit of $ 0.12.
Why is ROE important to earnings growth?
So far we have learned that ROE measures how efficiently a company generates its profits. Based on how much of its profits the company intends to reinvest or “keep”, we can then evaluate a company’s future ability to generate profit. In general, all other things being equal, companies with high ROE and profit sharing will have a higher growth rate than companies that do not share these characteristics.
Ampco-Pittsburgh’s earnings growth and 12% ROE
To begin with, the Ampco-Pittsburgh ROE looks acceptable. Even compared to the industry average of 12%, the company’s ROE looks pretty decent. As a result, this should have laid the foundation for Ampco-Pittsburgh’s decent 7.5% growth over the past five years.
We then compared Ampco-Pittsburgh’s net profit growth to that of the industry and found that the company’s growth was below the industry average growth rate of 22% over the same period, which is a little worrying.
NYSE: AP Past Earnings Growth January 31, 2021
The foundation of a company’s value creation is largely tied to profit growth. It is important for an investor to know if the market has priced in the company’s expected earnings growth (or decline). This then helps them determine whether the stock is placed for a bright or bleak future. What is AP worth today? The intrinsic value infographic in our free research report helps illustrate if AP is currently mispriced by the market.
Is Ampco-Pittsburgh reinvesting its profits efficiently?
Ampco-Pittsburgh pays no dividend, which means that all profits are reinvested in the business, which explains the company’s reasonable earnings growth.
Overall, we’re pretty happy with the performance of Ampco-Pittsburgh. In particular, it’s nice to see that the company has invested heavily in its business and, along with a high rate of return, has resulted in respectable earnings growth. However, when examining current analyst estimates, we were concerned that while the company has increased earnings in the past, analysts believe earnings will shrink in the future. For more information on the latest analyst forecasts for the company, see this visualization of analyst forecasts for the company.
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This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. We want to provide you with a long-term, focused analysis based on fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.
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