Mermeren Kombinat AD's (ATH:MERKO) stock is up by a considerable 15% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Mermeren Kombinat AD's ROE.
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.
How Do You 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 Mermeren Kombinat AD is:
40% = €17m ÷ €42m (Based on the trailing twelve months to June 2020).
The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.40 in profit.
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. 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.
A Side By Side comparison of Mermeren Kombinat AD's Earnings Growth And 40% ROE
Firstly, we acknowledge that Mermeren Kombinat AD has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 8.3% which is quite remarkable. Under the circumstances, Mermeren Kombinat AD's considerable five year net income growth of 35% was to be expected.
Next, on comparing with the industry net income growth, we found that Mermeren Kombinat AD's growth is quite high when compared to the industry average growth of 7.4% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Mermeren Kombinat AD fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Mermeren Kombinat AD Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 94% (implying that it keeps only 6.3% of profits) for Mermeren Kombinat AD suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.
Moreover, Mermeren Kombinat AD is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.
In total, it does look like Mermeren Kombinat AD has some positive aspects to its business. Namely, its high earnings growth, which was likely due to its high ROE. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining hardly any of its profits. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Mermeren Kombinat AD and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.
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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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