Shares in Auction Technology Group ( LON:ATG ) are up a whopping 30% over the past three months. As most know, fundamentals are what typically drive market price movements over the long term, so we decided to take a look at the company’s key financials today to determine if they play any role in recent price action. In particular, today we’ll focus on Auction Technology Group’s ROE.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how efficiently their capital is being reinvested. Put another way, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest analysis on Auction Technology Group
How is ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Auction Technology Group is:
3.2% = £17m ÷ £530m (Based on trailing twelve months to September 2023).
“Return” refers to the company’s earnings over the past year. So, this means that for every £1 of its shareholder’s investment, the company generates a profit of £0.03.
What is the relationship between ROE and revenue growth?
We have already established that ROE serves as an effective profit-generating measure of a company’s future earnings. Based on how much of its earnings the company chooses to reinvest or “hold,” we can then estimate the company’s future ability to generate earnings. All else being equal, the higher the ROE and earnings retention, the higher the growth rate of a company compared to companies that do not necessarily have these characteristics.
Side-by-side comparison of Auction Technology Group’s earnings growth and 3.2% ROE
It is quite clear that Auction Technology Group’s ROE is quite low. Not only that, even compared to the industry average of 11%, the company’s ROE is completely unremarkable. However, surprisingly, Auction Technology Group has seen an outstanding net income growth of 41% over the past five years. Therefore, there may be other reasons behind this growth. For example, the company has a low payout ratio or is managed efficiently.
Then, when compared to industry net income growth, we found that Auction Technology Group’s growth was quite high compared to the industry average growth of 11% over the same period, which is great to see.
The basis for valuing a company is largely related to its revenue growth. What investors need to determine next is whether the expected earnings growth, or lack thereof, is already built into the stock price. This then helps them determine whether the stock is set for a bright or dark future. Has the market priced in the future outlook for ATG? You can find out in our latest Intrinsic Value Infographic Research Report.
Does it effectively reinvest its profits from Auction Technology Group?
Auction Technology Group does not pay regular dividends to its shareholders, meaning that the company reinvests all of its profits into the business. This is likely the reason for the high revenue growth discussed above.
Summary
Overall, we think Auction Technology Group has some positives. With a high rate of reinvestment, albeit with a low ROE, the company was able to see significant growth in its earnings. With that said, the latest forecasts from industry analysts reveal that the company’s revenue growth is expected to slow. To learn more about the company’s future revenue growth projections, check this out Free of charge report analyst estimates for the company to learn more.
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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts, using only an unbiased methodology, and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. We aim to provide you with long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.
