With its stock down 17% in the past month, it’s easy to overlook ADTRAN (NASDAQ: ADTN). Since stock prices are usually determined by a company’s long-term fundamentals, which in this case seem quite weak, we decided to study the key financial metrics of the company. Specifically, we have decided to study ADTRAN’s ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
How to calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for ADTRAN is:
4.7% = US $ 18 million ÷ US $ 376 million (based on the last twelve months to June 2021).
The “return” is the profit of the last twelve months. Another way to look at this is that for every dollar in equity, the company was able to make $ 0.05 in profit.
What is the relationship between ROE and profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. 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. 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.
ADTRAN profit growth and 4.7% ROE
At first glance, ADTRAN’s ROE does not look very promising. We then compared the company’s ROE to that of the industry as a whole and were disappointed to find that the ROE is 14% below the industry average. For this reason, ADTRAN’s 46% drop in net income over five years is not surprising given its lower ROE. We believe there could be other factors at play here as well. For example, the company has a very high payout ratio or faces competitive pressures.
So, in the next step, we compared the performance of ADTRAN to that of the industry and were disappointed to find that as the company reduced its profits, the industry increased its profits at a rate of. 0.1% over the same period.
NasdaqGS: ADTN Past Profit Growth September 19, 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. This then helps him determine whether the stock is set for a bright or dark future. If you’re wondering about ADTRAN’s valuation, check out this gauge of its price / earnings ratio, relative to its industry.
Is ADTRAN Efficiently Using Its Retained Earnings?
ADTRAN has a high LTM (or last twelve months) payout ratio of 99% (i.e. it keeps 1.3% of its profits). This suggests that the company pays most of its profits as dividends to its shareholders. This partly explains why its profits have declined. With only a little money reinvested in the business, earnings growth would obviously be little or no. Our risk dashboard must include the 3 risks that we have identified for ADTRAN.
Additionally, ADTRAN has paid dividends over a period of at least ten years, which suggests that sustaining dividend payments is much more important to management, even if it comes at the expense of growing the business. . Our latest analyst data shows the company’s future payout ratio is expected to drop to 35% over the next three years.
All in all, we would have thought carefully before deciding on any investment action regarding ADTRAN. Concretely, it showed a rather unsatisfactory performance in terms of earnings growth, and a low ROE and an equally low reinvestment rate seem to be at the origin of this insufficient performance. That said, we have studied the latest analysts’ forecasts and found that while the company has cut profits in the past, analysts expect its profits to rise in the future. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
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.
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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.