Is Ampco-Pittsburgh Company (NYSE: AP )’s latest inventory efficiency a mirrored image of your monetary well being?
Ampco-Pittsburgh (NYSE: AP) has had an excellent run in the stock market for the past three months, with the stock rising a whopping 56%. 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 this article, we’ve decided to focus on the Ampco-Pittsburgh ROE.
ROE, or return on equity, is a useful tool for assessing how effectively a company can generate a return on the investment received from its shareholders. In short, the ROE shows the profit each dollar makes on its shareholder investment.
Check out our latest analysis for Ampco-Pittsburgh
How is the ROE calculated?
The ROE can be calculated using the following formula:
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).
The “return” is the amount earned after tax over the past twelve months. This means that for every $ 1 worth of equity, the company made 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. Depending on how much of those profits the company reinvests or “retains” and how effectively this is done, we can then assess a company’s earnings growth potential. 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
At first, Ampco-Pittsburgh appears to have a respectable ROE. When compared to the industry, we found that the average ROE for the industry is similar at 12%. This undoubtedly contributes to Ampco-Pittsburgh’s modest 7.5% net profit growth over the past five years.
The story goes on
As a next step, we compared Ampco-Pittsburgh’s net profit growth to that of the industry and were disappointed that the company’s growth was below the industry’s average growth of 21% over the same period.
Past earnings growth
Earnings growth is a big factor in stock valuation. It is important for an investor to know if the market has priced in the company’s expected earnings growth (or decline). This way, they have an idea of whether the stock is being directed into clear blue water or whether marshy water is waiting for it. Is Ampco-Pittsburgh fairly valued compared to other companies? These 3 assessment criteria can help you make a decision.
Is Ampco-Pittsburgh reinvesting its profits efficiently?
Ampco-Pittsburgh does not currently pay a dividend, which essentially means all profits have been reinvested in the business. This definitely adds to the decent earnings growth discussed above.
Overall, we think Ampco-Pittsburgh performed quite well. We particularly like that the company is reinvesting heavily in its business with a high return. As a result, the decent earnings growth is not surprising. 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 forecast for the company, see this visualization of analyst forecast for the company.
This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks 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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