Should Weakness in Atlas Engineered Products Ltd.'s (CVE:AEP) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

Atlas Engineered Products (CVE:AEP) has had a rough three months with its share price down 17%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Atlas Engineered Products' 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Atlas Engineered Products

How Is ROE Calculated?

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 Atlas Engineered Products is:

8.0% = CA$1.0m ÷ CA$13m (Based on the trailing twelve months to March 2021).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.08 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. 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. 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 Atlas Engineered Products' Earnings Growth And 8.0% ROE

When you first look at it, Atlas Engineered Products' ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 18% either. However, we we're pleasantly surprised to see that Atlas Engineered Products grew its net income at a significant rate of 25% in the last five years. So, there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Atlas Engineered Products' growth is quite high when compared to the industry average growth of 6.8% in the same period, which is great 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. What is AEP worth today? The intrinsic value infographic in our free research report helps visualize whether AEP is currently mispriced by the market.

Is Atlas Engineered Products Efficiently Re-investing Its Profits?

Summary

On the whole, we do feel that Atlas Engineered Products has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 4 risks we have identified for Atlas Engineered Products by visiting our risks dashboard for free on our platform here.

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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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