Is Neochim AD's (BUL:NEOH) Recent Stock Performance Tethered To Its Strong Fundamentals?

Neochim AD's (BUL:NEOH) stock is up by a considerable 135% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Neochim AD's ROE today.

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 Neochim AD

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 Neochim AD is:

35% = лв50m ÷ лв146m (Based on the trailing twelve months to December 2021).

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 BGN0.35.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Neochim AD's Earnings Growth And 35% ROE

To begin with, Neochim AD has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 14% the company's ROE is quite impressive. This probably laid the groundwork for Neochim AD's moderate 14% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Neochim AD's growth is quite high when compared to the industry average growth of 12% 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. 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. If you're wondering about Neochim AD's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Neochim AD Efficiently Re-investing Its Profits?

In Neochim AD's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 6.5% (or a retention ratio of 94%), which suggests that the company is investing most of its profits to grow its business.

While Neochim AD has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Conclusion

In total, we are pretty happy with Neochim AD's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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 Neochim AD visit our risks dashboard for free.

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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.