Could Mixed Fundamentals Be The Reason For Port Flot-Burgas AD's (BUL:PFB) Unexciting Performance On The Stock Market?

Port Flot-Burgas AD's (BUL:PFB) stock was mostly flat over the past week. 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 Port Flot-Burgas 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 Port Flot-Burgas 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 Port Flot-Burgas AD is:

2.6% = лв1.1m ÷ лв43m (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 BGN0.03 in profit.

What Is The Relationship Between ROE And 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Port Flot-Burgas AD's Earnings Growth And 2.6% ROE

It is hard to argue that Port Flot-Burgas AD's ROE is much good in and of itself. Not just that, even compared to the industry average of 7.7%, the company's ROE is entirely unremarkable. For this reason, Port Flot-Burgas AD's five year net income decline of 35% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

However, when we compared Port Flot-Burgas AD's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 2.9% in the same period. This is quite worrisome.

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. 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 Port Flot-Burgas AD is trading on a high P/E or a low P/E, relative to its industry.

Is Port Flot-Burgas AD Making Efficient Use Of Its Profits?

Conclusion

On the whole, we feel that the performance shown by Port Flot-Burgas AD can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. 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. You can see the 3 risks we have identified for Port Flot-Burgas 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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