CZG - Ceská zbrojovka Group SE's (SEP:CZG) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that CZG - Ceská zbrojovka Group's (SEP:CZG) stock increased significantly by 24% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on CZG - Ceská zbrojovka Group's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for CZG - Ceská zbrojovka Group

How To Calculate Return On Equity?

ROE 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 CZG - Ceská zbrojovka Group is:

20% = Kč655m ÷ Kč3.3b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every CZK1 of its shareholder's investments, the company generates a profit of CZK0.20.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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 CZG - Ceská zbrojovka Group's Earnings Growth And 20% ROE

To begin with, CZG - Ceská zbrojovka Group seems to have a respectable ROE. On comparing with the average industry ROE of 11% the company's ROE looks pretty remarkable. This certainly adds some context to CZG - Ceská zbrojovka Group's decent 7.2% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that CZG - Ceská zbrojovka Group's reported growth was lower than the industry growth of 11% in the same period, which is not something we like 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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about CZG - Ceská zbrojovka Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is CZG - Ceská zbrojovka Group Efficiently Re-investing Its Profits?

Summary

Overall, we are quite pleased with CZG - Ceská zbrojovka Group's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 1 risk we have identified for CZG - Ceská zbrojovka Group 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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