Sakana S.A.'s (WSE:SKN) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Sakana (WSE:SKN) has had a great run on the share market with its stock up by a significant 18% over the last month. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to Sakana's ROE today.

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 Sakana

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

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

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

9.6% = zł134k ÷ zł1.4m (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each PLN1 of shareholders' capital it has, the company made PLN0.10 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. 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.

Sakana's Earnings Growth And 9.6% ROE

When you first look at it, Sakana's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 10%, we may spare it some thought. Looking at Sakana's exceptional 46% five-year net income growth in particular, we are definitely impressed. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Sakana's growth is quite high when compared to the industry average growth of 21% in the same period, which is great to see.

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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Sakana is trading on a high P/E or a low P/E, relative to its industry.

Is Sakana Using Its Retained Earnings Effectively?

Sakana has very a high three-year median payout ratio of 191% suggesting that the company's shareholders are getting paid from more than just the company's earnings. However, this hasn't hampered its ability to grow as we saw earlier. Although, it could be worth keeping an eye on the high payout ratio as that's a huge risk. To know the 4 risks we have identified for Sakana visit our risks dashboard for free.

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

Summary

Overall, we have mixed feelings about Sakana. While the company has posted impressive earnings growth, its poor ROE and low earnings retention makes us doubtful if that growth could continue, if by any chance the business is faced with any sort of risk. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Sakana and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.