Sanok Rubber Company Spólka Akcyjna's (WSE:SNK) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?

Sanok Rubber Company Spólka Akcyjna (WSE:SNK) has had a great run on the share market with its stock up by a significant 45% over the last month. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimatley dictates market outcomes. Specifically, we decided to study Sanok Rubber Company Spólka Akcyjna's ROE in this article.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Sanok Rubber Company Spólka Akcyjna

How To Calculate Return On Equity?

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 Sanok Rubber Company Spólka Akcyjna is:

9.6% = zł47m ÷ zł495m (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every PLN1 worth of equity, the company was able to earn PLN0.10 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. 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.

A Side By Side comparison of Sanok Rubber Company Spólka Akcyjna's Earnings Growth And 9.6% ROE

When you first look at it, Sanok Rubber Company Spólka Akcyjna's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 7.3% which we definitely can't overlook. But then again, seeing that Sanok Rubber Company Spólka Akcyjna's net income shrunk at a rate of 19% in the past five years, makes us think again. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the shrinking earnings.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 0.8% in the same period, we still found Sanok Rubber Company Spólka Akcyjna's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Sanok Rubber Company Spólka Akcyjna's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Sanok Rubber Company Spólka Akcyjna Making Efficient Use Of Its Profits?

While the company did payout a portion of its dividend in the past, it currently doesn't pay a dividend. This implies that potentially all of its profits are being reinvested in the business.

Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 77% over the next three years. Regardless, the future ROE for Sanok Rubber Company Spólka Akcyjna is predicted to decline to 3.8% despite the anticipated decrease in the payout ratio. We reckon that there could probably be other factors that could be driving the forseen decline in the company's ROE.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Sanok Rubber Company Spólka Akcyjna. Its earnings growth particularly is not much to talk about even though it does have a pretty respectable ROE. The lack of growth can be blamed on its poor earnings retention. As discussed earlier, the company is retaining hardly any of its profits. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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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