Is The Market Rewarding Korporacja KGL S.A. (WSE:KGL) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?

It is hard to get excited after looking at Korporacja KGL's (WSE:KGL) recent performance, when its stock has declined 3.0% over the past week. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Specifically, we decided to study Korporacja KGL'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Korporacja KGL

How Do You 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 Korporacja KGL is:

10% = zł14m ÷ zł131m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. That means that for every PLN1 worth of shareholders' equity, the company generated PLN0.10 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Korporacja KGL's Earnings Growth And 10% ROE

When you first look at it, Korporacja KGL's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 10%. But then again, Korporacja KGL's five year net income shrunk at a rate of 3.8%. Bear in mind, the company does have a slightly low ROE. Hence, this goes some way in explaining the shrinking earnings.

That being said, we compared Korporacja KGL'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 13% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Korporacja KGL fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Korporacja KGL Making Efficient Use Of Its Profits?

When we piece together Korporacja KGL's low three-year median payout ratio of 16% (where it is retaining 84% of its profits), calculated for the last three-year period, we are puzzled by the lack of growth. This typically shouldn't be the case when a company is retaining most of its earnings. So there could be some other explanations in that regard. For example, the company's business may be deteriorating.

Additionally, Korporacja KGL has paid dividends over a period of four years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 19%. As a result, Korporacja KGL's ROE is not expected to change by much either, which we inferred from the analyst estimate of 11% for future ROE.

Summary

On the whole, we feel that the performance shown by Korporacja KGL 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. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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