Is Koncar - distributivni i specijalni transformatori d.d.'s (ZGSE:KODT) Latest Stock Performance A Reflection Of Its Financial Health?

Most readers would already be aware that Koncar - distributivni i specijalni transformatori d.d's (ZGSE:KODT) stock increased significantly by 41% 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 Koncar - distributivni i specijalni transformatori d.d's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Koncar - distributivni i specijalni transformatori d.d

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 Koncar - distributivni i specijalni transformatori d.d is:

31% = €31m ÷ €100m (Based on the trailing twelve months to June 2023).

The 'return' is the income the business earned over the last year. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.31.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Koncar - distributivni i specijalni transformatori d.d's Earnings Growth And 31% ROE

First thing first, we like that Koncar - distributivni i specijalni transformatori d.d has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 14% also doesn't go unnoticed by us. As a result, Koncar - distributivni i specijalni transformatori d.d's exceptional 32% net income growth seen over the past five years, doesn't come as a surprise.

We then compared Koncar - distributivni i specijalni transformatori d.d's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 26% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Koncar - distributivni i specijalni transformatori d.d is trading on a high P/E or a low P/E, relative to its industry.

Is Koncar - distributivni i specijalni transformatori d.d Efficiently Re-investing Its Profits?

Koncar - distributivni i specijalni transformatori d.d's three-year median payout ratio is a pretty moderate 30%, meaning the company retains 70% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Koncar - distributivni i specijalni transformatori d.d is reinvesting its earnings efficiently.

Moreover, Koncar - distributivni i specijalni transformatori d.d 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 25%. Regardless, Koncar - distributivni i specijalni transformatori d.d's ROE is speculated to decline to 25% despite there being no anticipated change in its payout ratio.

Summary

Overall, we are quite pleased with Koncar - distributivni i specijalni transformatori d.d'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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.