Is Albemarle Corporation's(NYSE:ALB) Recent Stock Performance Tethered To Its Strong Fundamentals?

Albemarle’s ROE today.” data-reactid=”28″>Albemarle (NYSE:ALB) has had a great run on the share market with its stock up by a significant 29% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Albemarle’s ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Albemarle ” data-reactid=”30″> Check out our latest analysis for Albemarle

How To Calculate Return On Equity?

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

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

12% = US$505m ÷ US$4.2b (Based on the trailing twelve months to June 2020).

The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.12 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Albemarle’s Earnings Growth And 12% ROE

At first glance, Albemarle seems to have a decent ROE. Further, the company’s ROE is similar to the industry average of 10%. This probably goes some way in explaining Albemarle’s moderate 14% growth over the past five years amongst other factors.

As a next step, we compared Albemarle’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.6%.

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check if Albemarle is trading on a high P/E or a low P/E, relative to its industry.” data-reactid=”58″>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. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Albemarle is trading on a high P/E or a low P/E, relative to its industry.

Is Albemarle Efficiently Re-investing Its Profits?

Albemarle has a three-year median payout ratio of 36%, which implies that it retains the remaining 64% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Besides, Albemarle has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to drop to 25% over the next three years. However, the company’s ROE is not expected to change by much despite the lower expected payout ratio.