Are IBC POLSKA F & P spólka akcyjna's (WSE:IBC) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

IBC POLSKA F & P spólka akcyjna (WSE:IBC) has had a rough week with its share price down 46%. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Specifically, we decided to study IBC POLSKA F & P spólka akcyjna'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for IBC POLSKA F & P spólka akcyjna

How Is ROE Calculated?

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 IBC POLSKA F & P spólka akcyjna is:

1.8% = zł78k ÷ zł4.2m (Based on the trailing twelve months to March 2022).

The 'return' is the amount earned after tax over the last twelve months. That means that for every PLN1 worth of shareholders' equity, the company generated PLN0.02 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 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.

IBC POLSKA F & P spólka akcyjna's Earnings Growth And 1.8% ROE

As you can see, IBC POLSKA F & P spólka akcyjna's ROE looks pretty weak. Even compared to the average industry ROE of 8.2%, the company's ROE is quite dismal. Given the circumstances, the significant decline in net income by 23% seen by IBC POLSKA F & P spólka akcyjna over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

That being said, we compared IBC POLSKA F & P spólka akcyjna's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 14% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. 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 IBC POLSKA F & P spólka akcyjna is trading on a high P/E or a low P/E, relative to its industry.

Is IBC POLSKA F & P spólka akcyjna Efficiently Re-investing Its Profits?

IBC POLSKA F & P spólka akcyjna doesn't pay any dividend, meaning that the company is keeping all of its profits, which makes us wonder why it is retaining its earnings if it can't use them to grow its business. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Summary

On the whole, we feel that the performance shown by IBC POLSKA F & P spólka akcyjna can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 3 risks we have identified for IBC POLSKA F & P spólka akcyjna.

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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.