Has Toplofikatsia-Burgas AD's (BUL:TPLB) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Toplofikatsia-Burgas AD's (BUL:TPLB) stock is up by a considerable 30% over the past month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Toplofikatsia-Burgas AD's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Toplofikatsia-Burgas 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 Toplofikatsia-Burgas AD is:

38% = лв13m ÷ лв36m (Based on the trailing twelve months to June 2023).

The 'return' is the yearly profit. So, this means that for every BGN1 of its shareholder's investments, the company generates a profit of BGN0.38.

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. 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.

A Side By Side comparison of Toplofikatsia-Burgas AD's Earnings Growth And 38% ROE

Firstly, we acknowledge that Toplofikatsia-Burgas AD has a significantly high ROE. Secondly, even when compared to the industry average of 13% the company's ROE is quite impressive. Needless to say, we are quite surprised to see that Toplofikatsia-Burgas AD's net income shrunk at a rate of 18% over the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 5.7% in the same 5-year period, we still found Toplofikatsia-Burgas AD's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

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. Is Toplofikatsia-Burgas AD fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Toplofikatsia-Burgas AD Using Its Retained Earnings Effectively?

Toplofikatsia-Burgas AD doesn't pay any dividend, meaning that the company is keeping all of its profits, which makes us wonder why it is retaining its earnings if it can't use them to grow its business. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Summary

On the whole, we do feel that Toplofikatsia-Burgas AD has some positive attributes. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. 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. You can see the 3 risks we have identified for Toplofikatsia-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. 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.