Has Hydraulic Elements and Systems AD's (BUL:HES) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Hydraulic Elements and Systems AD (BUL:HES) has had a great run on the share market with its stock up by a significant 28% over the last three months. 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. In this article, we decided to focus on Hydraulic Elements and Systems AD's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Hydraulic Elements and Systems AD

How To Calculate Return On Equity?

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 Hydraulic Elements and Systems AD is:

14% = лв5.7m ÷ лв41m (Based on the trailing twelve months to December 2020).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every BGN1 worth of equity, the company was able to earn BGN0.14 in profit.

Why Is ROE Important For 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.

Hydraulic Elements and Systems AD's Earnings Growth And 14% ROE

At first glance, Hydraulic Elements and Systems AD seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 9.0%. However, for some reason, the higher returns aren't reflected in Hydraulic Elements and Systems AD's meagre five year net income growth average of 3.0%. That's a bit unexpected from a company which has such a high rate of return. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

Next, on comparing Hydraulic Elements and Systems AD's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 3.0% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Using Its Retained Earnings Effectively?

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.

Summary

On the whole, we do feel that Hydraulic Elements and Systems AD has some positive attributes. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. 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 1 risk we have identified for Hydraulic Elements and Systems AD by visiting our risks dashboard for free on our platform here.

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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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