Could Mixed Fundamentals Be The Reason For Himsnab Bulgaria AD's (BUL:58E) Unexciting Performance On The Stock Market?

By
Simply Wall St
Published
January 17, 2021

Looking at Himsnab Bulgaria AD's (BUL:58E) mostly flat share price movement over the past week, it is easy to think that there’s nothing interesting about the stock. Given that stock prices usually follow the long-term financial performance of the business, we wonder if the company's mixed fundamentals are weighing heavily on the company's share price movements. Particularly, we will be paying attention to Himsnab Bulgaria AD's ROE today.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Himsnab Bulgaria AD

How To 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 Himsnab Bulgaria AD is:

2.9% = лв3.8m ÷ лв132m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. So, this means that for every BGN1 of its shareholder's investments, the company generates a profit of BGN0.03.

Why Is ROE Important For Earnings Growth?

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

Himsnab Bulgaria AD's Earnings Growth And 2.9% ROE

It is quite clear that Himsnab Bulgaria AD's ROE is rather low. An industry comparison shows that the company's ROE is not much different from the industry average of 2.9% either. Given the low ROE Himsnab Bulgaria AD's five year net income decline of 12% is not surprising.

So, as a next step, we compared Himsnab Bulgaria AD's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 1.1% in the same period.

BUL:58E Past Earnings Growth January 17th 2021

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Himsnab Bulgaria AD fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Himsnab Bulgaria AD Using Its Retained Earnings Effectively?

Summary

Overall, we have mixed feelings about Himsnab Bulgaria AD. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 3 risks we have identified for Himsnab Bulgaria AD.

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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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