Govena Lighting S.A.'s (WSE:GOV) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

By
Simply Wall St
Published
January 25, 2022
WSE:GOV
Source: Shutterstock

It is hard to get excited after looking at Govena Lighting's (WSE:GOV) recent performance, when its stock has declined 12% over the past week. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Govena Lighting'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Govena Lighting

How To 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 Govena Lighting is:

4.1% = zł692k ÷ zł17m (Based on the trailing twelve months to September 2021).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every PLN1 of its shareholder's investments, the company generates a profit of PLN0.04.

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. 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. 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.

Govena Lighting's Earnings Growth And 4.1% ROE

It is quite clear that Govena Lighting's ROE is rather low. Not just that, even compared to the industry average of 11%, the company's ROE is entirely unremarkable. In spite of this, Govena Lighting was able to grow its net income considerably, at a rate of 31% in the last five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Govena Lighting'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 32% in the same period.

past-earnings-growth
WSE:GOV Past Earnings Growth January 25th 2022

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Govena Lighting fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Govena Lighting Making Efficient Use Of Its Profits?

Govena Lighting 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.

Summary

Overall, we feel that Govena Lighting 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 Govena Lighting visit our risks dashboard for free.

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