Atom Empreendimentos e Participações S.A. (BVMF:ATOM3) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

By
Simply Wall St
Published
November 18, 2021
BOVESPA:ATOM3
Source: Shutterstock

With its stock down 39% over the past three months, it is easy to disregard Atom Empreendimentos e Participações (BVMF:ATOM3). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Atom Empreendimentos e Participações' ROE.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Atom Empreendimentos e Participações

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Atom Empreendimentos e Participações is:

43% = R$7.7m ÷ R$18m (Based on the trailing twelve months to September 2021).

The 'return' is the profit over the last twelve months. So, this means that for every R$1 of its shareholder's investments, the company generates a profit of R$0.43.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.

Atom Empreendimentos e Participações' Earnings Growth And 43% ROE

First thing first, we like that Atom Empreendimentos e Participações has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 12% which is quite remarkable. Under the circumstances, Atom Empreendimentos e Participações' considerable five year net income growth of 39% was to be expected.

Next, on comparing with the industry net income growth, we found that Atom Empreendimentos e Participações' growth is quite high when compared to the industry average growth of 5.7% in the same period, which is great to see.

past-earnings-growth
BOVESPA:ATOM3 Past Earnings Growth November 19th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Atom Empreendimentos e Participações fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Atom Empreendimentos e Participações Efficiently Re-investing Its Profits?

Atom Empreendimentos e Participações doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Summary

Overall, we are quite pleased with Atom Empreendimentos e Participações' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 3 risks we have identified for Atom Empreendimentos e Participações by visiting our risks dashboard for free on our platform here.

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