APS Energia SA's (WSE:APE) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

APS Energia (WSE:APE) has had a great run on the share market with its stock up by a significant 92% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study APS Energia'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for APS Energia

How Do You 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 APS Energia is:

9.6% = zł4.2m ÷ zł44m (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. That means that for every PLN1 worth of shareholders' equity, the company generated PLN0.10 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of APS Energia's Earnings Growth And 9.6% ROE

On the face of it, APS Energia's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.6%. Moreover, we are quite pleased to see that APS Energia's net income grew significantly at a rate of 26% over the last five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then performed a comparison between APS Energia's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 26% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is APS Energia fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is APS Energia Using Its Retained Earnings Effectively?

The three-year median payout ratio for APS Energia is 37%, which is moderately low. The company is retaining the remaining 63%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like APS Energia is reinvesting its earnings efficiently.

Additionally, APS Energia has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we feel that APS Energia certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 4 risks we have identified for APS Energia visit our risks dashboard for free.

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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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