Are Robust Financials Driving The Recent Rally In Ateam Holdings Co., Ltd.'s (TSE:3662) Stock?

Ateam Holdings (TSE:3662) has had a great run on the share market with its stock up by a significant 36% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Ateam Holdings' ROE in this article.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

How To Calculate Return On Equity?

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 Ateam Holdings is:

17% = JP¥1.7b ÷ JP¥10b (Based on the trailing twelve months to January 2025).

The 'return' is the profit over the last twelve months. That means that for every ¥1 worth of shareholders' equity, the company generated ¥0.17 in profit.

View our latest analysis for Ateam Holdings

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

A Side By Side comparison of Ateam Holdings' Earnings Growth And 17% ROE

At first glance, Ateam Holdings seems to have a decent ROE. Especially when compared to the industry average of 7.9% the company's ROE looks pretty impressive. This certainly adds some context to Ateam Holdings' exceptional 21% net income growth seen over the past five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Ateam Holdings' growth is quite high when compared to the industry average growth of 9.0% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Ateam Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Ateam Holdings Using Its Retained Earnings Effectively?

Ateam Holdings has a really low LTM (or last twelve month) payout ratio of 20%, meaning that it has the remaining 80% left over to reinvest into its business. So it looks like Ateam Holdings is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Ateam Holdings has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we feel that Ateam Holdings' 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. 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 Ateam Holdings by visiting our risks dashboard for free on our platform here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.