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With its stock down 2.6% over the past three months, it is easy to disregard Atlan Holdings Bhd (KLSE:ATLAN). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Atlan Holdings Bhd’s ROE today.
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 Atlan Holdings Bhd
How Do You Calculate Return On Equity?
ROE 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 Atlan Holdings Bhd is:
4.9% = RM25m ÷ RM512m (Based on the trailing twelve months to May 2024).
The ‘return’ is the yearly profit. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.05 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
Atlan Holdings Bhd’s Earnings Growth And 4.9% ROE
It is hard to argue that Atlan Holdings Bhd’s ROE is much good in and of itself. Not just that, even compared to the industry average of 9.0%, the company’s ROE is entirely unremarkable. Although, we can see that Atlan Holdings Bhd saw a modest net income growth of 16% over the past five years. We believe that there might be other aspects that are positively influencing the company’s earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing Atlan Holdings Bhd’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 20% over the last few years.
Earnings growth is an important metric to consider when valuing a stock. 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. If you’re wondering about Atlan Holdings Bhd’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Atlan Holdings Bhd Using Its Retained Earnings Effectively?
With a three-year median payout ratio of 46% (implying that the company retains 54% of its profits), it seems that Atlan Holdings Bhd is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that’s well covered.
Besides, Atlan Holdings Bhd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.
Conclusion
On the whole, we do feel that Atlan Holdings Bhd has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won’t completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard will have the 1 risk we have identified for Atlan Holdings Bhd.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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