Is Koncar - distributivni i specijalni transformatori d.d.'s(ZGSE:KODT) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Koncar - distributivni i specijalni transformatori d.d's (ZGSE:KODT) stock increased significantly by 45% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Koncar - distributivni i specijalni transformatori d.d's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Koncar - distributivni i specijalni transformatori d.d

How Is ROE Calculated?

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 Koncar - distributivni i specijalni transformatori d.d is:

13% = HRK48m ÷ HRK369m (Based on the trailing twelve months to March 2020).

The 'return' is the yearly profit. So, this means that for every HRK1 of its shareholder's investments, the company generates a profit of HRK0.13.

What Has ROE Got To Do With 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. 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.

Koncar - distributivni i specijalni transformatori d.d's Earnings Growth And 13% ROE

To begin with, Koncar - distributivni i specijalni transformatori d.d seems to have a respectable ROE. On comparing with the average industry ROE of 11% the company's ROE looks pretty remarkable. Probably as a result of this, Koncar - distributivni i specijalni transformatori d.d was able to see a decent growth of 12% over the last five years.

Next, on comparing with the industry net income growth, we found that Koncar - distributivni i specijalni transformatori d.d's growth is quite high when compared to the industry average growth of 6.9% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Koncar - distributivni i specijalni transformatori d.d is trading on a high P/E or a low P/E, relative to its industry.

Is Koncar - distributivni i specijalni transformatori d.d Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 38% (implying that the company retains 62% of its profits), it seems that Koncar - distributivni i specijalni transformatori d.d is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Koncar - distributivni i specijalni transformatori d.d is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

In total, we are pretty happy with Koncar - distributivni i specijalni transformatori d.d's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 2 risks we have identified for Koncar - distributivni i specijalni transformatori d.d visit our risks dashboard for free.

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This article by Simply Wall St is general in nature. 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. Thank you for reading.