Art's-Way Manufacturing Co., Inc.'s (NASDAQ:ARTW) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Most readers would already be aware that Art's-Way Manufacturing's (NASDAQ:ARTW) stock increased significantly by 35% over the past three months. 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. In this article, we decided to focus on Art's-Way Manufacturing'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.

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How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Art's-Way Manufacturing is:

2.3% = US$274k ÷ US$12m (Based on the trailing twelve months to February 2025).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.02 in profit.

See our latest analysis for Art's-Way Manufacturing

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. 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.

Art's-Way Manufacturing's Earnings Growth And 2.3% ROE

It is quite clear that Art's-Way Manufacturing's ROE is rather low. Even compared to the average industry ROE of 13%, the company's ROE is quite dismal. However, we we're pleasantly surprised to see that Art's-Way Manufacturing grew its net income at a significant rate of 52% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

We then compared Art's-Way Manufacturing's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 17% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Art's-Way Manufacturing fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Art's-Way Manufacturing Making Efficient Use Of Its Profits?

Given that Art's-Way Manufacturing doesn't pay any regular dividends to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

Overall, we feel that Art's-Way Manufacturing certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard will have the 1 risk we have identified for Art's-Way Manufacturing.

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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.