ATC CARGO S.A.'s (WSE:ATA) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Most readers would already be aware that ATC CARGO's (WSE:ATA) stock increased significantly by 25% over the past month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study ATC CARGO's ROE in this article.

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

See our latest analysis for ATC CARGO

How Is ROE Calculated?

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 ATC CARGO is:

18% = zł12m ÷ zł65m (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every PLN1 worth of shareholders' equity, the company generated PLN0.18 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of ATC CARGO's Earnings Growth And 18% ROE

To begin with, ATC CARGO seems to have a respectable ROE. Even when compared to the industry average of 18% the company's ROE looks quite decent. However, while ATC CARGO has a pretty respectable ROE, its five year net income decline rate was 3.4% . Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. These include low earnings retention or poor allocation of capital.

However, when we compared ATC CARGO's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 40% in the same period. This is quite worrisome.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 ATC CARGO is trading on a high P/E or a low P/E, relative to its industry.

Is ATC CARGO Making Efficient Use Of Its Profits?

ATC CARGO's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 73% (or a retention ratio of 27%). With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. You can see the 5 risks we have identified for ATC CARGO by visiting our risks dashboard for free on our platform here.

Additionally, ATC CARGO has paid dividends over a period of four years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.

Summary

In total, it does look like ATC CARGO has some positive aspects to its business. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into ATC CARGO's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.