Could The Market Be Wrong About INA-Industrija nafte, d.d. (ZGSE:INA) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at INA-Industrija nafte d.d's (ZGSE:INA) recent performance, when its stock has declined 12% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study INA-Industrija nafte d.d's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for INA-Industrija nafte 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 INA-Industrija nafte d.d is:

15% = €222m ÷ €1.5b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every €1 worth of shareholders' equity, the company generated €0.15 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. 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.

INA-Industrija nafte d.d's Earnings Growth And 15% ROE

To start with, INA-Industrija nafte d.d's ROE looks acceptable. Even when compared to the industry average of 15% the company's ROE looks quite decent. This probably goes some way in explaining INA-Industrija nafte d.d's significant 35% net income growth over the past five years amongst other factors. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared INA-Industrija nafte d.d's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 31% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 INA-Industrija nafte d.d is trading on a high P/E or a low P/E, relative to its industry.

Is INA-Industrija nafte d.d Making Efficient Use Of Its Profits?

INA-Industrija nafte d.d's significant three-year median payout ratio of 78% (where it is retaining only 22% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Moreover, INA-Industrija nafte 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.

Summary

Overall, we are quite pleased with INA-Industrija nafte d.d's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on INA-Industrija nafte d.d 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. 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.