Are Alten S.A.'s (EPA:ATE) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

By
Simply Wall St
Published
May 12, 2022
ENXTPA:ATE
Source: Shutterstock

Alten (EPA:ATE) has had a rough three months with its share price down 20%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Alten's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Alten

How Is ROE Calculated?

Return on equity 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 Alten is:

15% = €208m ÷ €1.4b (Based on the trailing twelve months to December 2021).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.15 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Alten's Earnings Growth And 15% ROE

At first glance, Alten seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 13%. Despite the moderate return on equity, Alten has posted a net income growth of 3.1% over the past five years. So, there could be some other factors at play that could be impacting the company's growth. For instance, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

Next, on comparing with the industry net income growth, we found that Alten's reported growth was lower than the industry growth of 4.9% in the same period, which is not something we like to see.

past-earnings-growth
ENXTPA:ATE Past Earnings Growth May 12th 2022

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for ATE? You can find out in our latest intrinsic value infographic research report.

Is Alten Making Efficient Use Of Its Profits?

A low three-year median payout ratio of 21% (implying that the company retains the remaining 79% of its income) suggests that Alten is retaining most of its profits. However, the low earnings growth number doesn't reflect this fact. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Alten has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 16% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.

Summary

Overall, we feel that Alten certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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