Hydraulic Elements and Systems AD's (BUL:4HE) Has Had A Decent Run On The Stock market: Are Fundamentals In The Driver's Seat?

Most readers would already know that Hydraulic Elements and Systems AD's (BUL:4HE) stock increased by 1.1% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. In this article, we decided to focus on Hydraulic Elements and Systems AD'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Hydraulic Elements and Systems AD

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Hydraulic Elements and Systems AD is:

11% = лв4.2m ÷ лв38m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each BGN1 of shareholders' capital it has, the company made BGN0.11 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Hydraulic Elements and Systems AD's Earnings Growth And 11% ROE

To start with, Hydraulic Elements and Systems AD's ROE looks acceptable. Even when compared to the industry average of 9.1% the company's ROE looks quite decent. However, we are curious as to how Hydraulic Elements and Systems AD's decent returns still resulted in flat growth for Hydraulic Elements and Systems AD in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

We then performed a comparison between Hydraulic Elements and Systems AD's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 1.6% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Hydraulic Elements and Systems AD fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hydraulic Elements and Systems AD Efficiently Re-investing Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

Overall, we feel that Hydraulic Elements and Systems AD certainly does have some positive factors to consider. Its earnings growth is decent, and the high ROE does contribute to that growth. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Hydraulic Elements and Systems AD and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.
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