Will Weakness in Autoliv, Inc.’s (NYSE:ALV) Stock Prove Temporary Given Strong Fundamentals?

Autoliv (NYSE:ALV) has had a rough three months with its share price down 15%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Autoliv’s ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company’s success at turning shareholder investments into profits.

See our latest analysis for Autoliv

How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Autoliv is:

27% = US$627m ÷ US$2.3b (Based on the trailing twelve months to June 2024).

The ‘return’ is the yearly profit. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.27.

Why Is ROE Important For Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.

Autoliv’s Earnings Growth And 27% ROE

Firstly, we acknowledge that Autoliv has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 13% also doesn’t go unnoticed by us. This probably laid the groundwork for Autoliv’s moderate 14% net income growth seen over the past five years.

We then performed a comparison between Autoliv’s net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 16% in the same 5-year period.

past-earnings-growth

past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. What is ALV worth today? The intrinsic value infographic in our free research report helps visualize whether ALV is currently mispriced by the market.

Is Autoliv Efficiently Re-investing Its Profits?

While Autoliv has a three-year median payout ratio of 53% (which means it retains 47% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn’t hampered its ability to grow.

Additionally, Autoliv has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 23% over the next three years. However, the company’s ROE is not expected to change by much despite the lower expected payout ratio.

Summary

On the whole, we feel that Autoliv’s performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that’s probably a good sign. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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

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