Should Weakness in Etropal AD's (BUL:5EO) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

With its stock down 1.7% over the past week, it is easy to disregard Etropal AD (BUL:5EO). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Etropal AD's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Etropal AD

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Etropal AD is:

0.8% = лв44k ÷ лв5.3m (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. So, this means that for every BGN1 of its shareholder's investments, the company generates a profit of BGN0.01.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Etropal AD's Earnings Growth And 0.8% ROE

It is hard to argue that Etropal AD's ROE is much good in and of itself. Even when compared to the industry average of 10%, the ROE figure is pretty disappointing. Etropal AD was still able to see a decent net income growth of 14% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. Such as - high earnings retention or an efficient management in place.

We then performed a comparison between Etropal AD's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 13% in the same period.

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 Etropal AD is trading on a high P/E or a low P/E, relative to its industry.

Is Etropal AD Efficiently Re-investing Its Profits?

Conclusion

Overall, we feel that Etropal AD certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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. To know the 3 risks we have identified for Etropal AD 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.
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