Are Robust Financials Driving The Recent Rally In Feerum S.A.'s (WSE:FEE) Stock?

Feerum (WSE:FEE) has had a great run on the share market with its stock up by a significant 16% over the last three months. 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. Specifically, we decided to study Feerum'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Feerum

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Feerum is:

13% = zł17m ÷ zł138m (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. So, this means that for every PLN1 of its shareholder's investments, the company generates a profit of PLN0.13.

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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Feerum's Earnings Growth And 13% ROE

To start with, Feerum's ROE looks acceptable. Especially when compared to the industry average of 8.9% the company's ROE looks pretty impressive. This probably laid the ground for Feerum's significant 36% net income growth seen over the past five years. We reckon that there could also 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.

As a next step, we compared Feerum's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 36% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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. Is Feerum fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Feerum Using Its Retained Earnings Effectively?

Feerum's three-year median payout ratio is a pretty moderate 25%, meaning the company retains 75% of its income. By the looks of it, the dividend is well covered and Feerum is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Feerum has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, we are pretty happy with Feerum's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 2 risks we have identified for Feerum.

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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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