Are Robust Financials Driving The Recent Rally In Zaklady Urzadzen Kotlowych Staporków S.A.'s (WSE:ZUK) Stock?

Zaklady Urzadzen Kotlowych Staporków (WSE:ZUK) has had a great run on the share market with its stock up by a significant 76% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Zaklady Urzadzen Kotlowych Staporków's ROE in this article.

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 Zaklady Urzadzen Kotlowych Staporków

How To 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 Zaklady Urzadzen Kotlowych Staporków is:

12% = zł2.6m ÷ zł21m (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every PLN1 worth of equity, the company was able to earn PLN0.12 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Zaklady Urzadzen Kotlowych Staporków's Earnings Growth And 12% ROE

To start with, Zaklady Urzadzen Kotlowych Staporków's ROE looks acceptable. Especially when compared to the industry average of 8.8% the company's ROE looks pretty impressive. Probably as a result of this, Zaklady Urzadzen Kotlowych Staporków was able to see an impressive net income growth of 41% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing Zaklady Urzadzen Kotlowych Staporków's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 38% 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. 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 Zaklady Urzadzen Kotlowych Staporków is trading on a high P/E or a low P/E, relative to its industry.

Is Zaklady Urzadzen Kotlowych Staporków Making Efficient Use Of Its Profits?

Zaklady Urzadzen Kotlowych Staporków doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Summary

On the whole, we feel that Zaklady Urzadzen Kotlowych Staporków's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 4 risks we have identified for Zaklady Urzadzen Kotlowych Staporków by visiting our risks dashboard for free on our platform here.

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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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