Sanok Rubber Company Spólka Akcyjna's (WSE:SNK) Stock Going Strong But Fundamentals Look Weak: What Implications Could This Have On The Stock?

Sanok Rubber Company Spólka Akcyjna (WSE:SNK) has had a great run on the share market with its stock up by a significant 12% over the last week. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. Specifically, we decided to study Sanok Rubber Company Spólka Akcyjna's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Sanok Rubber Company Spólka Akcyjna

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 Sanok Rubber Company Spólka Akcyjna is:

11% = zł62m ÷ zł566m (Based on the trailing twelve months to June 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each PLN1 of shareholders' capital it has, the company made PLN0.11 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. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Sanok Rubber Company Spólka Akcyjna's Earnings Growth And 11% ROE

On the face of it, Sanok Rubber Company Spólka Akcyjna's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 11%, we may spare it some thought. Having said that, Sanok Rubber Company Spólka Akcyjna's five year net income decline rate was 5.0%. Remember, the company's ROE is a bit low to begin with. Therefore, the decline in earnings could also be the result of this.

As a next step, we compared Sanok Rubber Company Spólka Akcyjna's performance with the industry and found thatSanok Rubber Company Spólka Akcyjna's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 2.6% in the same period, which is a slower than the company.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Sanok Rubber Company Spólka Akcyjna is trading on a high P/E or a low P/E, relative to its industry.

Is Sanok Rubber Company Spólka Akcyjna Efficiently Re-investing Its Profits?

Sanok Rubber Company Spólka Akcyjna's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 56% (or a retention ratio of 44%). The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. You can see the 2 risks we have identified for Sanok Rubber Company Spólka Akcyjna by visiting our risks dashboard for free on our platform here.

Moreover, Sanok Rubber Company Spólka Akcyjna 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.

Summary

On the whole, Sanok Rubber Company Spólka Akcyjna's performance is quite a big let-down. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Sanok Rubber Company Spólka Akcyjna's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.