Is CSY Spólka Akcyjna's(WSE:CSY) Recent Stock Performance Tethered To Its Strong Fundamentals?

By
Simply Wall St
Published
September 02, 2020
WSE:CSY

CSY Spólka Akcyjna (WSE:CSY) has had a great run on the share market with its stock up by a significant 12% over the last 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. Particularly, we will be paying attention to CSY Spólka Akcyjna's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for CSY Spólka Akcyjna

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 CSY Spólka Akcyjna is:

17% = zł9.8m ÷ zł58m (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every PLN1 worth of equity, the company was able to earn PLN0.17 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

CSY Spólka Akcyjna's Earnings Growth And 17% ROE

At first glance, CSY Spólka Akcyjna seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 11%. Probably as a result of this, CSY Spólka Akcyjna was able to see an impressive net income growth of 58% over the last five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared CSY Spólka Akcyjna's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 36% in the same period.

past-earnings-growth
WSE:CSY Past Earnings Growth September 2nd 2020

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about CSY Spólka Akcyjna's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is CSY Spólka Akcyjna Efficiently Re-investing Its Profits?

CSY Spólka Akcyjna doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Conclusion

On the whole, we feel that CSY Spólka Akcyjna'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. Our risks dashboard would have the 3 risks we have identified for CSY Spólka Akcyjna.

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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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