Yahoo Finance Are Robust Financials Driving The Recent Rally In Atlas Pearls Limited's (ASX:ATP) Stock?
Most readers would already be aware that Atlas Pearls' (ASX:ATP) stock increased significantly by 52% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Atlas Pearls' 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Atlas Pearls
How Is ROE Calculated?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Atlas Pearls is:
50% = AU$26m ÷ AU$52m (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.50.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
Atlas Pearls' Earnings Growth And 50% ROE
Firstly, we acknowledge that Atlas Pearls has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 7.9% also doesn't go unnoticed by us. Under the circumstances, Atlas Pearls' considerable five year net income growth of 60% was to be expected.
As a next step, we compared Atlas Pearls' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 14%.
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 Atlas Pearls''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Atlas Pearls Using Its Retained Earnings Effectively?
Summary
Overall, we are quite pleased with Atlas Pearls' 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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 4 risks we have identified for Atlas Pearls by visiting our risks dashboard for free on our platform here.
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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.
