FERRO S.A.'s (WSE:FRO) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

FERRO (WSE:FRO) has had a great run on the share market with its stock up by a significant 31% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study FERRO'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for FERRO

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 FERRO is:

19% = zł55m ÷ zł294m (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 PLN0.19.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

FERRO's Earnings Growth And 19% ROE

To begin with, FERRO seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 12%. Probably as a result of this, FERRO was able to see a decent growth of 16% over the last five years.

We then compared FERRO's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 24% in the same period, which is a bit concerning.

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 FERRO's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is FERRO Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 62% (or a retention ratio of 38%) for FERRO suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

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

Summary

On the whole, we do feel that FERRO has some positive attributes. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into FERRO's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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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