Are Australian Agricultural Projects Ltd (ASX:AAP)’s mixed financials the reason for its dismal stock market performance?

With its stock down 15% over the past week, it’s easy to overlook Australia’s agricultural plans (ASX:AAP). It’s possible that the markets ignored the company’s financial differences and decided to look into the negative sentiment. Fundamentals usually dictate market outcomes, so it makes sense to study company finances. In particular, we will pay attention to the ROE of Australian Agricultural Projects today.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

Check out our latest analysis of Australian agricultural projects

How is ROE calculated?

ROE can be calculated using the formula:

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

So, based on the formula above, the ROE for Australian agricultural projects is:

6.7% = AU$520,000 ÷ AU$7.7 million (based on trailing 12 months to December 2021).

“Yield” is the income the business has earned over the past year. Another way to think about this is that for every 1 Australian dollar of equity, the company was able to make a profit of 0.07 Australian dollars.

What is the relationship between ROE and earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

Growth in profits from Australian agricultural projects and ROE of 6.7%

At first glance, Australian Agricultural Projects’ ROE does not look very promising. However, since the company’s ROE is similar to the industry average ROE of 8.1%, we can spare it some thought. That said, Australian Agricultural Projects’ five-year net income decline rate was 3.3%. Keep in mind that the company has a slightly low ROE. Therefore, this partly explains the drop in income.

So, in a next step, we benchmarked the performance of Australian Agricultural Projects against the industry and were disappointed to find that while the company was cutting profits, the industry was increasing profits at a rate of 13% over the same period.

ASX: AAP Past Earnings Growth May 27, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. Is Australian Agricultural Projects correctly valued compared to other companies? These 3 assessment metrics might help you decide.

Are Australian agricultural projects using their profits efficiently?

Australian Agricultural Projects pays no dividends, which means the company keeps all of its profits, which makes us wonder why it keeps its profits if it can’t use them to grow its business. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.

Conclusion

All in all, we are a little mixed on the performance of Australian Agricultural Projects. Although the company has a high earnings retention rate, its low rate of return is likely hampering its earnings growth. In conclusion, we would proceed with caution with this business and one way to do that would be to review the risk profile of the business. To learn about the 4 risks we have identified for Australian agricultural projects, visit our risk dashboard for free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

About Meredith Campagna

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