Atlantic Grupa d.d.'s (ZGSE:ATGR) Recent Stock Performance Looks Decent- Can Strong Fundamentals Be the Reason?

Most readers would already know that Atlantic Grupa d.d's (ZGSE:ATGR) stock increased by 3.0% over the past week. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Atlantic Grupa d.d's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Atlantic Grupa d.d

How Do You 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 Atlantic Grupa d.d is:

12% = Kn346m ÷ Kn2.9b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. That means that for every HRK1 worth of shareholders' equity, the company generated HRK0.12 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Atlantic Grupa d.d's Earnings Growth And 12% ROE

To start with, Atlantic Grupa d.d's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 7.4%. This probably laid the ground for Atlantic Grupa d.d's moderate 12% net income growth seen over the past five years.

Next, on comparing Atlantic Grupa d.d's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 12% in the same period.

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. Has the market priced in the future outlook for ATGR? You can find out in our latest intrinsic value infographic research report.

Is Atlantic Grupa d.d Using Its Retained Earnings Effectively?

Atlantic Grupa d.d's three-year median payout ratio to shareholders is 24% (implying that it retains 76% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Moreover, Atlantic Grupa d.d is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 25%. Accordingly, forecasts suggest that Atlantic Grupa d.d's future ROE will be 10% which is again, similar to the current ROE.

Conclusion

On the whole, we feel that Atlantic Grupa d.d's 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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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