Airtel Africa (LON: AAF) has had an excellent performance in the equity market with a significant increase in its share of 36% in the past three months. Since the market typically pays for a company’s long-term fundamentals, we decided to study the company’s KPIs to see if they could influence the market. Specifically, we have decided to study Airtel Africa’s ROE in this article.
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 other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest analysis for Airtel Africa
How to calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, Airtel Africa’s ROE is:
17% = US $ 605 million ÷ US $ 3.6 billion (based on the last twelve months to September 2021).
“Return” refers to a company’s profits over the past year. So this means that for every £ 1 invested by its shareholder, the company generates a profit of £ 0.17.
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. We now need to assess how much profit the business is reinvesting or “holding back” for future growth, which then gives us an idea of the growth potential of the business. 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 Airtel Africa’s profit growth and 17% ROE
At first glance, Airtel Africa appears to have a decent ROE. Compared to the industry’s average ROE of 11%, the company’s ROE looks quite remarkable. This likely laid the foundation for Airtel Africa’s significant net income growth of 52% seen over the past five years. We believe there could be other factors at play here as well. Such as – high profit retention or effective management in place.
In the next step, we compared Airtel Africa’s net income growth with the industry and luckily we found that the growth observed by the company is higher than the industry average growth of 8.2 %.
Profit growth is a huge factor in the valuation of stocks. 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’ll have an idea if the action is heading for clear blue waters or swampy waters ahead. Is the AAF valued enough? This intrinsic business value infographic has everything you need to know.
Is Airtel Africa using its profits efficiently?
Airtel Africa has a three-year median payout rate of 44% (where it keeps 56% of its revenue), which is neither too low nor too high. So it looks like Airtel Africa is reinvesting effectively so as to record impressive profit growth (discussed above) and pay a well-hedged dividend.
In addition to seeing profit growth, Airtel Africa has only recently started paying dividends. It is quite possible that the company is trying to impress its shareholders. Our latest analyst data shows the company’s future payout ratio is expected to drop to 34% over the next three years. However, the company’s ROE is not expected to change much despite the expected lower payout ratio.
Overall, we think Airtel Africa’s performance has been quite good. Specifically, we like the fact that the company is reinvesting a huge portion of its profits at a high rate of return. This of course allowed the company to experience substantial growth in profits. 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 documents. Simply Wall St has no position in any of the stocks mentioned.
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