AGCO Corporation’s (NYSE: AGCO) fundamentals look pretty strong: Could the market be wrong about the stock?
It’s hard to get excited after looking at the recent performance of AGCO (NYSE: AGCO), as its stock has fallen 17% in the past three months. But if you pay close attention to it, you might understand that its strong financial data could mean that the stock could potentially see its value rise in the long run, given how the markets typically reward companies with good health. financial. In this article, we have decided to focus on AGCO’s ROE.
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 is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
Check out our latest review for AGCO
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, AGCO’s ROE is:
16% = US $ 505 million ÷ US $ 3.1 billion (based on the last twelve months to March 2021).
The “return” is the income the business has earned over the past year. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.16.
Why is ROE important for profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
AGCO profit growth and 16% ROE
For starters, AGCO appears to have a respectable ROE. Especially compared to the industry average of 11%, the company’s ROE looks pretty impressive. This certainly adds context to AGCO’s decent 12% net income growth seen over the past five years.
In the next step, we compared AGCO’s net income growth with that of the industry and luckily we found that the growth observed by the company is above the industry average growth of 8 , 1%.
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 will have an idea if the title is heading for clear blue waters or marshy waters ahead. What is AGCO worth today? The intrinsic value infographic in our free research report helps to visualize whether AGCO is currently being poorly valued by the market.
Is AGCO Efficiently Reinvesting Its Profits?
AGCO has a low three-year median payout ratio of 20%, which means the company keeps the remaining 80% of its profits. This suggests that management is reinvesting most of the profits to grow the business.
In addition, AGCO pays dividends over a period of eight years. This shows that the company is committed to sharing the profits with its shareholders. After reviewing the latest consensus data from analysts, we found that the company’s future payout ratio is expected to drop to 7.4% over the next three years. Thus, the expected drop in the payout ratio explains the expected increase in the company’s ROE to 21% over the same period.
Conclusion
All in all, we are quite satisfied with the performance of AGCO. In particular, it is great to see that the company is investing heavily in its business and with a high rate of return, which has resulted in significant growth in its profits. That said, the company’s earnings growth is expected to slow, as current analyst estimates predict. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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This Simply Wall St article is general in nature. 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.
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