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Is Art's-Way Manufacturing Co., Inc.'s (NASDAQ:ARTW) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Art's-Way Manufacturing's (NASDAQ:ARTW) stock is up by a considerable 12% over the past month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Art's-Way Manufacturing's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Art's-Way Manufacturing

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Art's-Way Manufacturing is:

3.8% = US$414k ÷ US$11m (Based on the trailing twelve months to August 2022).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.04 in profit.

What Has ROE Got To Do With 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. 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.

Art's-Way Manufacturing's Earnings Growth And 3.8% ROE

It is hard to argue that Art's-Way Manufacturing's ROE is much good in and of itself. Even compared to the average industry ROE of 13%, the company's ROE is quite dismal. Despite this, surprisingly, Art's-Way Manufacturing saw an exceptional 29% net income growth over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Art's-Way Manufacturing's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.6%.

past-earnings-growth
past-earnings-growth

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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Art's-Way Manufacturing's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Art's-Way Manufacturing Making Efficient Use Of Its Profits?

Art's-Way Manufacturing doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Summary

In total, it does look like Art's-Way Manufacturing has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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. You can see the 3 risks we have identified for Art's-Way Manufacturing by visiting our risks dashboard for free on our platform here.

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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