Do Its Financials Have Any Role To Play In Driving Instal Kraków S.A.'s (WSE:INK) Stock Up Recently?

Most readers would already be aware that Instal Kraków's (WSE:INK) stock increased significantly by 26% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Instal Kraków's ROE.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Instal Kraków

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 Instal Kraków is:

8.1% = zł23m ÷ zł283m (Based on the trailing twelve months to March 2021).

The 'return' is the profit over the last twelve months. That means that for every PLN1 worth of shareholders' equity, the company generated PLN0.08 in profit.

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. 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.

Instal Kraków's Earnings Growth And 8.1% ROE

At first glance, Instal Kraków's ROE doesn't look very promising. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 15%. Despite this, surprisingly, Instal Kraków saw an exceptional 21% net income growth over the past five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing Instal Kraków's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 21% in the same period.

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 Instal Kraków fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Instal Kraków Making Efficient Use Of Its Profits?

Instal Kraków has a three-year median payout ratio of 49% (where it is retaining 51% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Instal Kraków is reinvesting its earnings efficiently.

Additionally, Instal Kraków has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we feel that Instal Kraków 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. Our risks dashboard would have the 2 risks we have identified for Instal Kraków.

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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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