Atal's (WSE:1AT) stock is up by a considerable 14% 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. In this article, we decided to focus on Atal's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How To Calculate Return On Equity?
ROE 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 Atal is:
19% = zł194m ÷ zł1.0b (Based on the trailing twelve months to March 2021).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every PLN1 of its shareholder's investments, the company generates a profit of PLN0.19.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.
Atal's Earnings Growth And 19% ROE
At first glance, Atal seems to have a decent ROE. On comparing with the average industry ROE of 15% the company's ROE looks pretty remarkable. This probably laid the ground for Atal's moderate 7.6% net income growth seen over the past five years.
As a next step, we compared Atal's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 7.6% 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 1AT? You can find out in our latest intrinsic value infographic research report.
Is Atal Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 73% (or a retention ratio of 27%) for Atal suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Besides, Atal has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 90% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.
In total, we are pretty happy with Atal's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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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