Atkore's (NYSE:ATKR) stock up by 8.7% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. In this article, we decided to focus on Atkore's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
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:
14% = US$193m ÷ US$1.4b (Based on the trailing twelve months to March 2025).
The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.14 in profit.
View our latest analysis for Atkore
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. 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. 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.
Atkore's Earnings Growth And 14% ROE
To start with, Atkore's ROE looks acceptable. Especially when compared to the industry average of 10% the company's ROE looks pretty impressive. This certainly adds some context to Atkore's decent 11% net income growth seen over the past five years.
We then performed a comparison between Atkore's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 13% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Atkore fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Atkore Efficiently Re-investing Its Profits?
Atkore's three-year median payout ratio to shareholders is 7.5% (implying that it retains 93% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.
While Atkore has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 9.7% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.
Conclusion
On the whole, we feel that Atkore's performance has been quite good. 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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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.