I am writing today to help inform people who are new to the stock market and looking to gauge the potential return on investment in ATA Inc (NASDAQ:ATAI).
Buying ATA makes you a partial owner of the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Therefore, looking at how efficiently ATA is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
ROCE: Explanation and Calculation
When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. To determine ATA’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). I have calculated ATA’s ROCE for you below:
ROCE Calculation for ATAI
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = CN¥90.15m ÷ (CN¥610.98m – CN¥226.55m) = 23.45%
The calculation above shows that ATAI’s earnings were 23.45% of capital employed. A good ROCE hurdle you should aim for in your investments is 15%, which is exceeded by ATAI and means the company creates a good amount of earnings on capital. If this can be sustained with good reinvestment opportunities or dividend distributions your capital has the potential to compound well over time.
Not so fast
ATAI is efficient with the use of capital, but this is only the case if ATAI continues to maintain the presently healthy ROCE, which will change if the company either earns less or requires more capital to create earnings. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking at the past 3 year period shows us that ATAI boosted investor return on capital employed from 8.69%. We can see that earnings have increased from CN¥32.94m to CN¥90.15m whilst capital employed also increased but to a smaller extent, which means the company has been able to improve ROCE by driving up earnings relative to the capital invested in the business.
ROCE for ATAI investors has grown in the last few years and is currently at a level that makes the company an attractive candidate that is capable of producing solid capital returns, and hence, an attractive return on investment. This is an ideal situation to be in, but return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and management ability. If you don’t pay attention to these factors you cannot be sure if this trend will continue or reverse due to reasons that cannot be seen by looking in the past. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for ATAI’s future growth? Take a look at our free research report of analyst consensus for ATAI’s outlook.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for ATA’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.