Is the recent performance of Atlas Pearls Limited (ASX:ATP) shares influenced by its fundamentals in any way?

Atlas Pearls (ASX:ATP) stock is up 48% in the past three months. As most know, fundamentals are what generally guide market price movements over the long term, so we decided to take a look at key financial indicators in business today to see if they have a role to play. play in the recent price movement. Specifically, we decided to study the ROE of Atlas Pearls in this article.

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 simpler terms, it measures a company’s profitability relative to equity.

See our latest review for Atlas Pearls

How is ROE calculated?

the return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Atlas Pearls is:

36% = AU$6.7 million ÷ AU$18 million (based on trailing 12 months to June 2021).

The “yield” is the amount earned after tax over the last twelve months. Another way to think about this is that for every 1 Australian dollar of equity, the company was able to make a profit of 0.36 Australian dollars.

What is the relationship between ROE and earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

A Side-by-Side Comparison of Atlas Pearls Earnings Growth and 36% ROE

For starters, Atlas Pearls has a pretty high ROE, which is interesting. Second, a comparison to the average industry-reported ROE of 10% also does not go unnoticed for us. For this reason, Atlas Pearls’ 38% decline in net income over five years raises the question of why high ROE has not translated into earnings growth. Based on this, we believe that there might be other reasons which have not been discussed so far in this article which might hinder the growth of the business. These include poor revenue retention or poor capital allocation.

That being said, we compared the performance of Atlas Pearls with that of the industry and became concerned when we found that while the company had reduced profits, the industry had increased profits at a rate of 5 .9% over the same period.

ASX: ATP Past Earnings Growth January 13, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. 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. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. Thus, you might want to check whether Atlas Pearls is trading on a high P/E or a low P/E, relative to its industry.

Does Atlas Pearls effectively reinvest its profits?

Atlas Pearls pays no dividends, which means the company keeps all of its profits, which makes us wonder why it keeps its profits if it can’t use them to grow its business. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.

Conclusion

All in all, it seems that Atlas Pearls has positive aspects for 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. While we wouldn’t completely dismiss the business, what we would do is try to figure out how risky the business is to make a more informed decision about the business. To learn about the 3 risks we have identified for Atlas Pearls, visit our risk dashboard for free.

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.

About Ian Crawford

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