It’s hard to get excited after looking at Atrion’s (NASDAQ:ATRI) recent performance, as its stock is down 11% in the past three months. But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In this article, we decided to focus on Atrion’s ROE.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
Check out our latest analysis for Atrion
How is ROE calculated?
the ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Atrion’s ROE is:
13% = $32 million ÷ $239 million (based on trailing 12 months to September 2021).
The “yield” is the profit of the last twelve months. Another way to think about this is that for every dollar of equity, the company was able to make a profit of $0.13.
What does ROE have to do with earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
Atrion earnings growth and ROE of 13%
At first glance, Atrion appears to have a decent ROE. Especially when compared to the industry average of 9.7%, the company’s ROE looks quite impressive. However, we are curious how high yields have still driven steady growth for Atrion over the past five years. Therefore, there could be other aspects that could potentially impede the growth of the business. For example, the company pays a large portion of its profits in the form of dividends or faces competitive pressures.
Next, we benchmarked Atrion’s net income growth against the industry and were disappointed to find that the company’s growth was below the industry average growth of 14% over the same period.
Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. Is Atrion correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Does Atrion effectively reinvest its profits?
Despite a three-year normal median payout ratio of 31% (or a retention rate of 69%), Atrion has not experienced strong earnings growth. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.
Additionally, Atrion has been paying dividends for at least a decade, suggesting that management must have perceived that shareholders prefer dividends to earnings growth.
Summary
All in all, it looks like Atrion has some positive aspects to its business. However, we are disappointed to see a lack of earnings growth, even despite a high ROE and high reinvestment rate. We believe there could be external factors that could negatively impact the business. So far, we have only had a brief discussion of corporate earnings growth. To better understand Atrion’s past earnings growth, check out this visualization of past earnings, revenue, and cash flow.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
