Weak Financial Prospects Seem To Be Dragging Down ATM Grupa S.A. (WSE:ATG) Stock

By
Simply Wall St
Published
February 25, 2022
WSE:ATG
Source: Shutterstock

It is hard to get excited after looking at ATM Grupa's (WSE:ATG) recent performance, when its stock has declined 15% over the past week. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Specifically, we decided to study ATM Grupa's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for ATM Grupa

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 ATM Grupa is:

10% = zł29m ÷ zł278m (Based on the trailing twelve months to September 2021).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each PLN1 of shareholders' capital it has, the company made PLN0.10 in profit.

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.

ATM Grupa's Earnings Growth And 10% ROE

On the face of it, ATM Grupa's ROE is not much to talk about. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 24%. As a result, ATM Grupa's flat net income growth over the past five years doesn't come as a surprise given its lower ROE.

We then compared ATM Grupa's net income growth with the industry and found that the average industry growth rate was 43% in the same period.

past-earnings-growth
WSE:ATG Past Earnings Growth February 25th 2022

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if ATM Grupa is trading on a high P/E or a low P/E, relative to its industry.

Is ATM Grupa Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 57% (implying that the company keeps only 43% of its income) of its business to reinvest into its business), most of ATM Grupa's profits are being paid to shareholders, which explains the absence of growth in earnings.

In addition, ATM Grupa has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

In total, we would have a hard think before deciding on any investment action concerning ATM Grupa. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on ATM Grupa and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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