Yahoo Finance Declining Stock and Solid Fundamentals: Is The Market Wrong About Atrion Corporation (NASDAQ:ATRI)?
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With its stock down 6.1% over the past three months, it is easy to disregard Atrion (NASDAQ:ATRI). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Atrion'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. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Atrion
How Do You 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 Atrion is:
15% = US$36m ÷ US$235m (Based on the trailing twelve months to March 2020).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.15 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
Atrion's Earnings Growth And 15% ROE
At first glance, Atrion seems to have a decent ROE. Especially when compared to the industry average of 12% the company's ROE looks pretty impressive. This certainly adds some context to Atrion's decent 6.3% net income growth seen over the past five years.
We then compared Atrion's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 13% in the same period, which is a bit concerning.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Atrion fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Atrion Using Its Retained Earnings Effectively?
Atrion has a three-year median payout ratio of 26%, which implies that it retains the remaining 74% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.
Additionally, Atrion has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.
Conclusion
In total, we are pretty happy with Atrion's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings.
This article by Simply Wall St is general in nature. 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.
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