Hydraulic Elements and Systems AD's (BUL:HES) Dismal Stock Performance Reflects Weak Fundamentals

Hydraulic Elements and Systems AD (BUL:HES) has had a rough three months with its share price down 18%. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study Hydraulic Elements and Systems AD's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Hydraulic Elements and Systems AD

How Is ROE Calculated?

The formula for ROE 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:

7.5% = лв3.6m ÷ лв48m (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. That means that for every BGN1 worth of shareholders' equity, the company generated BGN0.07 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of Hydraulic Elements and Systems AD's Earnings Growth And 7.5% ROE

At first glance, Hydraulic Elements and Systems AD's ROE doesn't look very promising. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 11% either. Hence, the flat earnings seen by Hydraulic Elements and Systems AD over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared Hydraulic Elements and Systems AD's net income growth with the industry and discovered that the industry saw an average growth of 14% in the same period.

Earnings growth is a huge factor in stock valuation. 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 Using Its Retained Earnings Effectively?

Hydraulic Elements and Systems AD has a high three-year median payout ratio of 92% (or a retention ratio of 7.6%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.

Moreover, Hydraulic Elements and Systems AD has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

Overall, we would be extremely cautious before making any decision on Hydraulic Elements and Systems AD. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. 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. 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.