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Atkore (NYSE:ATKR) has had a rough three months with its share price down 31%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Atkore's ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Atkore
How To 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 Atkore is:
25% = US$381m ÷ US$1.5b (Based on the trailing twelve months to December 2024).
The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.25 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
Atkore's Earnings Growth And 25% ROE
To begin with, Atkore has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 8.6% the company's ROE is quite impressive. This probably laid the groundwork for Atkore's moderate 18% net income growth seen over the past five years.
Next, on comparing Atkore's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 17% over the last few years.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is ATKR fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Atkore Using Its Retained Earnings Effectively?
Atkore's three-year median payout ratio to shareholders is 6.0% (implying that it retains 94% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.