Does The Market Have A Low Tolerance For Zwack Unicum Nyrt.'s (BUSE:ZWACK) Mixed Fundamentals?

It is hard to get excited after looking at Zwack Unicum Nyrt's (BUSE:ZWACK) recent performance, when its stock has declined 1.8% over the past month. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study Zwack Unicum Nyrt'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Zwack Unicum Nyrt

How To Calculate Return On Equity?

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 Zwack Unicum Nyrt is:

27% = Ft1.7b ÷ Ft6.2b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every HUF1 worth of shareholders' equity, the company generated HUF0.27 in profit.

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. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Zwack Unicum Nyrt's Earnings Growth And 27% ROE

To begin with, Zwack Unicum Nyrt has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 8.0% which is quite remarkable. Despite this, Zwack Unicum Nyrt's five year net income growth was quite flat over the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

We then compared Zwack Unicum Nyrt's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 5.6% in the same period, which is a bit concerning.

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 Zwack Unicum Nyrt is trading on a high P/E or a low P/E, relative to its industry.

Is Zwack Unicum Nyrt Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 95% (meaning, the company retains only 5.4% of profits) for Zwack Unicum Nyrt suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Moreover, Zwack Unicum Nyrt has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

In total, we're a bit ambivalent about Zwack Unicum Nyrt's performance. While the company does have a high rate of return, its low earnings retention is probably what's hampering its earnings growth. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Zwack Unicum Nyrt's past profit growth, check out this visualization 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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