Adtalem Global Education (NYSE:ATGE) has had a great performance in the stock market as its stock is up 6.6% over the past month. However, we wonder if the company’s inconsistent financials will have any negative impact on current share price momentum. In this article, we have decided to focus on Adtalem Global Education’s ROE.
Return on Equity or Return on Equity is an important factor that must be taken into consideration by the shareholders because it tells them how effectively they will reinvest their capital. Simply put, it is used to evaluate a company’s profitability in relation to its capital.
See our latest analysis on Adtalem Global Education
How is return on equity calculated?
ROE can be calculated using the formula:
Return on Equity = Net profit (from continuing operations) ÷ Shareholders’ equity
So, based on the above formula, the ROE for Adtalem Global Education is:
2.5% = $38M ÷ $1.5B (Based on the subsequent 12 months to December 2022).
The “return” is the profit over the past twelve months. So, this means that for every $1 invested by the shareholders, the company makes $0.02 in profit.
What is the relationship between ROE and earnings growth?
So far, we’ve learned that return on equity is a measure of a company’s profitability. Depending on how much of these earnings the company reinvests or “keeps,” and how effectively it is, we can then assess the company’s earnings growth potential. In general, other things being equal, companies with high return on equity and dividend retention have a higher rate of growth than companies that do not share these traits.
Adtalem Global Education earnings growth and 2.5% ROE
It’s hard to argue that Adtalem Global Education’s Rules of Engagement are very good in their own right. Not only that, even compared to the industry average of 9.6%, the company’s return on equity is completely unremarkable. For this reason, Adtalem Global Education’s five-year net income decline of 18% is not surprising given the low return on equity. We think there could also be other factors at play here. For example, the company has poorly allocated capital, or the company has a very high payout ratio.
However, we compared Adtalem Global Education’s performance to the industry and were concerned to find that despite the company trimming its dividend, the industry grew its dividend by an average of 6.2% in the same period.
Dividend growth is a big factor in stock valuation. It is important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them determine if the stock’s future looks promising or inauspicious. Does Adtalem Global Education rate fairly compared to other companies? These three assessment procedures may help you decide.
Does Adtalem Global Education use its profits efficiently?
Adtalem Global Education pays no dividends, which means all of its earnings could potentially be reinvested back into the business, which doesn’t explain why the company’s earnings would shrink if it kept all of its earnings. So there could be some other explanations in this regard. For example, the company’s business may deteriorate.
Overall, we feel that the performance shown by Adtalem Global Education could be open to many interpretations. While the company has a high reinvestment rate, the low return on equity means that all of this reinvestment does not reap any benefit for its investors and, moreover, has a negative impact on earnings growth. However, industry analysts’ latest forecasts show that analysts expect to see a significant improvement in the company’s earnings growth rate. To learn more about the latest analyst predictions for the company, check out this visualization of analyst predictions for the company.
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