Is Atom Empreendimentos e Participações S.A.'s (BVMF:ATOM3) Latest Stock Performance A Reflection Of Its Financial Health?

Atom Empreendimentos e Participações' (BVMF:ATOM3) stock is up by a considerable 10% over the past 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 Atom Empreendimentos e Participações' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Atom Empreendimentos e Participações

How To Calculate Return On Equity?

The formula for return on equity 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:

73% = R$12m ÷ R$16m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. That means that for every R$1 worth of shareholders' equity, the company generated R$0.73 in profit.

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. 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.

A Side By Side comparison of Atom Empreendimentos e Participações' Earnings Growth And 73% ROE

Firstly, we acknowledge that Atom Empreendimentos e Participações has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 5.1% which is quite remarkable. Under the circumstances, Atom Empreendimentos e Participações' considerable five year net income growth of 51% 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 6.8% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Atom Empreendimentos e Participações is trading on a high P/E or a low P/E, relative to its industry.

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

Conclusion

On the whole, we feel that Atom Empreendimentos e Participações' performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial 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. 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. To know the 3 risks we have identified for Atom Empreendimentos e Participações visit our risks dashboard for free.

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This article by Simply Wall St is general in nature. 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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