Should Weakness in ATC CARGO S.A.'s (WSE:ATA) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

It is hard to get excited after looking at ATC CARGO's (WSE:ATA) recent performance, when its stock has declined 25% over the past three months. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study ATC CARGO's 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for ATC CARGO

How To 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 ATC CARGO is:

43% = zł25m ÷ zł59m (Based on the trailing twelve months to June 2023).

The 'return' is the amount earned after tax over the last twelve months. That means that for every PLN1 worth of shareholders' equity, the company generated PLN0.43 in profit.

Why Is ROE Important For 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

ATC CARGO's Earnings Growth And 43% ROE

To begin with, ATC CARGO has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 24% which is quite remarkable. So, the substantial 30% net income growth seen by ATC CARGO over the past five years isn't overly surprising.

We then compared ATC CARGO's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 50% in the same 5-year period, which is a bit concerning.

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 ATC CARGO's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is ATC CARGO Using Its Retained Earnings Effectively?

ATC CARGO's significant three-year median payout ratio of 76% (where it is retaining only 24% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

While ATC CARGO has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Conclusion

Overall, we feel that ATC CARGO certainly does have some positive factors to consider. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of ATC CARGO's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.