Stock Analysis

Is Honkarakenne Oyj's (HEL:HONBS) Recent Stock Performance Tethered To Its Strong Fundamentals?

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HLSE:HONBS
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Honkarakenne Oyj (HEL:HONBS) has had a great run on the share market with its stock up by a significant 17% over the last month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Honkarakenne Oyj's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Our analysis indicates that HONBS is potentially undervalued!

How Is ROE Calculated?

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 Honkarakenne Oyj is:

18% = €3.1m ÷ €17m (Based on the trailing twelve months to June 2022).

The 'return' is the income the business earned over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.18 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Honkarakenne Oyj's Earnings Growth And 18% ROE

At first glance, Honkarakenne Oyj seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 11%. This certainly adds some context to Honkarakenne Oyj's exceptional 31% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

When you consider the fact that the industry earnings have shrunk at a rate of 8.0% in the same period, the company's net income growth is pretty remarkable.

past-earnings-growth
HLSE:HONBS Past Earnings Growth December 1st 2022

Earnings growth is a huge factor in stock valuation. 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. Is Honkarakenne Oyj fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Honkarakenne Oyj Making Efficient Use Of Its Profits?

Conclusion

In total, we are pretty happy with Honkarakenne Oyj's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard would have the 2 risks we have identified for Honkarakenne Oyj.

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Find out whether Honkarakenne Oyj is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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