It is hard to get excited after looking at Atmos Energy’s (NYSE:ATO) recent performance, when its stock has declined 6.5% over the past month. 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. In this article, we decided to focus on Atmos Energy’s ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
How To Calculate Return On Equity?
Return on equity 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 Atmos Energy is:
8.1% = US$725m ÷ US$9.0b (Based on the trailing twelve months to March 2022).
The ‘return’ is the income the business earned over the last year. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.08.
Why Is ROE Important For Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. 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. 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.
A Side By Side comparison of Atmos Energy’s Earnings Growth And 8.1% ROE
When you first look at it, Atmos Energy’s ROE doesn’t look that attractive. However, its ROE is similar to the industry average of 8.1%, so we won’t completely dismiss the company. Even so, Atmos Energy has shown a fairly decent growth in its net income which grew at a rate of 9.9%. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company’s earnings growth. Such as – high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that Atmos Energy’s growth is quite high when compared to the industry average growth of 6.4% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One 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 prospects. So, you may want to check if Atmos Energy is trading on a high P/E or a low P/E, relative to its industry.
Is Atmos Energy Efficiently Re-investing Its Profits?
Atmos Energy has a healthy combination of a moderate three-year median payout ratio of 48% (or a retention ratio of 52%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.
Additionally, Atmos Energy has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 51% of its profits over the next three years. As a result, Atmos Energy’s ROE is not expected to change by much either, which we inferred from the analyst estimate of 9.0% for future ROE.
In total, it does look like Atmos Energy has some positive aspects to its business. 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. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.