Is Weakness In Atkore Inc. (NYSE:ATKR) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

September 28, 2022
  •  Updated
November 24, 2022
NYSE:ATKR
Source: Shutterstock

It is hard to get excited after looking at Atkore's (NYSE:ATKR) recent performance, when its stock has declined 18% over the past month. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Atkore'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Atkore

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Atkore is:

79% = US$895m ÷ US$1.1b (Based on the trailing twelve months to June 2022).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.79 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. 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 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.

Atkore's Earnings Growth And 79% ROE

Firstly, we acknowledge that Atkore has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 12% also doesn't go unnoticed by us. So, the substantial 50% net income growth seen by Atkore over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Atkore's growth is quite high when compared to the industry average growth of 9.4% in the same period, which is great to see.

past-earnings-growth
NYSE:ATKR Past Earnings Growth September 28th 2022

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. What is ATKR worth today? The intrinsic value infographic in our free research report helps visualize whether ATKR is currently mispriced by the market.

Is Atkore Making Efficient Use Of Its Profits?

Atkore doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Summary

In total, we are pretty happy with Atkore's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Valuation is complex, but we're helping make it simple.

Find out whether Atkore is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis