Is Alimentation Couche-Tard Inc.’s (TSE:ATD) Latest Stock Performance Being Led By Its Strong Fundamentals?

Alimentation Couche-Tard (TSE:ATD) shares are up 4.0% over the past month. Given that the market rewards strong financials over the long term, we wonder if that is the case in this case. In this article, we decided to focus on Alimentation Couche-Tard’s ROE.

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 turning shareholders’ investments into profits.

Check out our latest analysis for Alimentation Couche-Tard

How do you calculate return on equity?

The Formula for ROE Is:

Return on Equity = Net Income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for Alimentation Couche-Tard is:

23% = $2.9 billion ÷ $13 billion (based on trailing 12 months to October 2022).

“Return” is the amount earned after tax over the past 12 months. Another way to think of it is that for every CA$1 in equity, the company was able to earn CA$0.23 in profit.

Why is ROE important for earnings growth?

We have already established that ROE serves as an efficient profitable measure of a company’s future profits. We now need to evaluate how much profit the company is reinvesting or “keeping” for future growth, which then gives us an idea of ​​the company’s growth potential. In general, companies with a high return on equity and earnings retention, all other things being equal, have a higher growth rate than companies that do not share these characteristics.

Alimentation Couche-Tard income growth and 23% ROE

First, we recognize that Alimentation Couche-Tard has a significantly high ROE. Second, we also see a comparison to the industry-reported average ROE of 16%. That likely paved the way for the modest 13% net income growth that Alimentation Couche-Tard has enjoyed over the past five years. growth

As a next step, we compared Alimentation Couche-Tard’s net income growth to that of the industry and were disappointed to find that the company’s growth was slower than the average industry growth of 24% over the same period.

Much of the basis for increasing the value of a company is tied to its earnings growth. The investor should try to determine whether expected growth or earnings decline, whichever is the case, is being priced in. This helps him determine if the stock’s future looks bright or ominous. Has the market priced in future prospects for ATD? You can find out in our latest intrinsic value research report in the form of an infographic.

Is Alimentation Couche-Tard efficiently reinvesting its profits?

Alimentation Couche-Tard’s three-year median payout ratio to shareholders is 10% (meaning it keeps 90% of its income), which is on the low side so it appears management is heavily reinvesting profits to keep it up expand business.

Additionally, Alimentation Couche-Tard has paid dividends for at least a decade, meaning the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the company’s future payout ratio is expected to increase to 14% over the next three years. Regardless, ROE for the company is not expected to change significantly despite the expected higher payout ratio.

Diploma

Overall, we think Alimentation Couche-Tard’s performance is quite good. In particular, it’s great to see that the company has invested heavily in its business and has resulted in respectable earnings growth along with a high rate of return. Against this backdrop, a study of the latest analyst forecasts reveals that the company is likely to experience a slowdown in its future earnings growth. To learn more about the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.

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This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.