Are Robust Financials Driving The Recent Rally In Atomenergoremont PLC's (BUL:ATOM) Stock?

Most readers would already be aware that Atomenergoremont's (BUL:ATOM) stock increased significantly by 30% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Atomenergoremont's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Atomenergoremont

How To Calculate Return On Equity?

ROE 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 Atomenergoremont is:

14% = лв32m ÷ лв222m (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every BGN1 worth of shareholders' equity, the company generated BGN0.14 in profit.

What Has ROE Got To Do With 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Atomenergoremont's Earnings Growth And 14% ROE

To start with, Atomenergoremont's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 12%. This certainly adds some context to Atomenergoremont's moderate 14% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Atomenergoremont's reported growth was lower than the industry growth of 19% over the last few years, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Atomenergoremont is trading on a high P/E or a low P/E, relative to its industry.

Is Atomenergoremont Making Efficient Use Of Its Profits?

Atomenergoremont has a low three-year median payout ratio of 2.1%, meaning that the company retains the remaining 98% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Besides, Atomenergoremont has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we feel that Atomenergoremont's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 2 risks we have identified for Atomenergoremont.

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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.