Can mixed fundamentals have a negative impact on the current momentum of SZAR Spólka Akcyjna (WSE:SZR) stock price?

SZAR Spólka Akcyjna (WSE:SZR) stock is up 16% over the past week. But the company’s key financial indicators seem to differ across the board, leading us to wonder whether the company’s current share price momentum can be sustained or not. Specifically, we decided to study the ROE of SZAR Spólka Akcyjna in this article.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In simple terms, it is used to assess the profitability of a company in relation to its equity.

See our latest review for SZAR Spólka Akcyjna

How do you calculate return on equity?

the return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for SZAR Spólka Akcyjna is:

6.0% = 856,000 zł ÷ 14 million zł (based on the last twelve months until December 2021).

The “return” is the annual profit. Another way to think about it is that for every 1 PLN worth of equity, the company was able to make a profit of 0.06 PLN.

What does ROE have to do with earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

A side-by-side comparison of SZAR Spólka Akcyjna’s earnings growth and ROE of 6.0%

At first glance, SZAR Spólka Akcyjna’s ROE does not look very promising. A quick closer look shows that the company’s ROE also doesn’t compare favorably to the industry average of 20%. Therefore, it might not be wrong to say that the 44% decline in net income over five years that SZAR Spólka Akcyjna saw was likely the result of lower ROE. However, there could also be other factors leading to lower income. For example, the company has a very high payout rate or faces competitive pressures.

That being said, we benchmarked SZAR Spólka Akcyjna’s performance with the industry and were concerned when we found that while the company had reduced profits, the industry had increased profits at a rate of 31% in during the same period.

WSE: SZR Past Earnings Growth 15 April 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. A 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 outlook. Thus, you might want to check whether SZAR Spólka Akcyjna is trading on a high P/E or a low P/E, relative to its sector.

Does SZAR Spólka Akcyjna effectively reinvest its profits?

SZAR Spólka Akcyjna does not pay any dividends, which means that the company keeps all its profits, which leads us to wonder why it keeps its profits if it cannot use them to expand its business. It seems that there could be other reasons for the lack in this regard. For example, the business might be in decline.

Summary

All in all, we’re a bit ambivalent about SZAR Spólka Akcyjna’s performance. Although the company has a high earnings retention rate, its low rate of return is likely hampering its earnings growth. In conclusion, we would proceed with caution with this business and one way to do that would be to review the risk profile of the business. To see the 1 risk we have identified for SZAR Spólka Akcyjna, visit our risk dashboard for free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

About Ian Crawford

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