Tamex Obiekty Sportowe S.A.'s (WSE:TOS) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

By
Simply Wall St
Published
June 15, 2021
WSE:TOS

Most readers would already be aware that Tamex Obiekty Sportowe's (WSE:TOS) stock increased significantly by 181% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Tamex Obiekty Sportowe's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Tamex Obiekty Sportowe

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 Tamex Obiekty Sportowe is:

11% = zł1.2m ÷ zł11m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. So, this means that for every PLN1 of its shareholder's investments, the company generates a profit of PLN0.11.

What Has ROE Got To Do With 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.

Tamex Obiekty Sportowe's Earnings Growth And 11% ROE

At first glance, Tamex Obiekty Sportowe seems to have a decent ROE. Even so, when compared with the average industry ROE of 15%, we aren't very excited. Needless to say, the 11% net income shrink rate seen by Tamex Obiekty Sportoweover the past five years is a huge dampener. Not to forget, the company does have a high ROE to begin with, just that it is lower than the industry average. Hence there might be some other aspects that are causing earnings to shrink. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

However, when we compared Tamex Obiekty Sportowe's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 21% in the same period. This is quite worrisome.

past-earnings-growth
WSE:TOS Past Earnings Growth June 16th 2021

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Tamex Obiekty Sportowe is trading on a high P/E or a low P/E, relative to its industry.

Is Tamex Obiekty Sportowe Making Efficient Use Of Its Profits?

Summary

In total, it does look like Tamex Obiekty Sportowe has some positive aspects to its business. However, while the company does have a decent ROE and a high profit retention, its earnings growth number is quite disappointing. This suggests that there might be some external threat to the business, that's hampering growth. 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 4 risks we have identified for Tamex Obiekty Sportowe.

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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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