Stock Analysis

Will Weakness in Internity S.A.'s (WSE:INT) Stock Prove Temporary Given Strong Fundamentals?

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WSE:INT
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With its stock down 9.1% over the past month, it is easy to disregard Internity (WSE:INT). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Internity'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Internity

How Do You Calculate Return On Equity?

The formula for ROE is:

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

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

14% = zł2.7m ÷ zł19m (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. That means that for every PLN1 worth of shareholders' equity, the company generated PLN0.14 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

Internity's Earnings Growth And 14% ROE

At first glance, Internity seems to have a decent ROE. Especially when compared to the industry average of 10% the company's ROE looks pretty impressive. This probably laid the ground for Internity's moderate 13% net income growth seen over the past five years.

As a next step, we compared Internity'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 13% in the same period.

past-earnings-growth
WSE:INT Past Earnings Growth January 10th 2021

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Internity's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Internity Making Efficient Use Of Its Profits?

While Internity has a three-year median payout ratio of 69% (which means it retains 31% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Moreover, Internity is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend.

Summary

Overall, we are quite pleased with Internity's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Internity's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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