Is Ormester Vagyonvédelmi Nyrt.'s(BUSE:ORMESTER) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Ormester Vagyonvédelmi Nyrt's (BUSE:ORMESTER) stock increased significantly by 14% over the past week. 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 Ormester Vagyonvédelmi Nyrt'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Ormester Vagyonvédelmi Nyrt

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Ormester Vagyonvédelmi Nyrt is:

14% = Ft48m ÷ Ft349m (Based on the trailing twelve months to June 2021).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each HUF1 of shareholders' capital it has, the company made HUF0.14 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. 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.

A Side By Side comparison of Ormester Vagyonvédelmi Nyrt's Earnings Growth And 14% ROE

At first glance, Ormester Vagyonvédelmi Nyrt seems to have a decent ROE. Especially when compared to the industry average of 11% the company's ROE looks pretty impressive. This certainly adds some context to Ormester Vagyonvédelmi Nyrt's decent 16% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Ormester Vagyonvédelmi Nyrt's growth is quite high when compared to the industry average growth of 9.3% in the same period, which is great to see.

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 Ormester Vagyonvédelmi Nyrt fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Ormester Vagyonvédelmi Nyrt Efficiently Re-investing Its Profits?

Given that Ormester Vagyonvédelmi Nyrt doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

On the whole, we feel that Ormester Vagyonvédelmi Nyrt's performance has been quite good. 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. To know the 2 risks we have identified for Ormester Vagyonvédelmi Nyrt visit our risks dashboard for free.

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.

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