Declining Stock and Decent Financials: Is The Market Wrong About Przedsiebiorstwo Robót Instalacyjnych Ekopark S.A. (WSE:EPR)?

With its stock down 39% over the past three months, it is easy to disregard Przedsiebiorstwo Robót Instalacyjnych Ekopark (WSE:EPR). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Przedsiebiorstwo Robót Instalacyjnych Ekopark'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Przedsiebiorstwo Robót Instalacyjnych Ekopark

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Przedsiebiorstwo Robót Instalacyjnych Ekopark is:

5.2% = zł196k ÷ zł3.8m (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each PLN1 of shareholders' capital it has, the company made PLN0.05 in profit.

Why Is ROE Important For 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. 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.

Przedsiebiorstwo Robót Instalacyjnych Ekopark's Earnings Growth And 5.2% ROE

It is quite clear that Przedsiebiorstwo Robót Instalacyjnych Ekopark's ROE is rather low. Even when compared to the industry average of 11%, the ROE figure is pretty disappointing. Although, we can see that Przedsiebiorstwo Robót Instalacyjnych Ekopark saw a modest net income growth of 13% over the past five years. We reckon that there could be other factors at play here. 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.

Next, on comparing with the industry net income growth, we found that Przedsiebiorstwo Robót Instalacyjnych Ekopark's reported growth was lower than the industry growth of 19% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. 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 Przedsiebiorstwo Robót Instalacyjnych Ekopark is trading on a high P/E or a low P/E, relative to its industry.

Is Przedsiebiorstwo Robót Instalacyjnych Ekopark Efficiently Re-investing Its Profits?

Przedsiebiorstwo Robót Instalacyjnych Ekopark doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the decent earnings growth number that we discussed above.

Summary

On the whole, we do feel that Przedsiebiorstwo Robót Instalacyjnych Ekopark has some positive attributes. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. 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 3 risks we have identified for Przedsiebiorstwo Robót Instalacyjnych Ekopark visit our risks dashboard for free.

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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.