Krynica Vitamin S.A.'s (WSE:KVT) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that Krynica Vitamin's (WSE:KVT) stock increased significantly by 65% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Krynica Vitamin's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Krynica Vitamin

How Do You 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 Krynica Vitamin is:

52% = zł55m ÷ zł106m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each PLN1 of shareholders' capital it has, the company made PLN0.52 in profit.

What Has ROE Got To Do With Earnings Growth?

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

Krynica Vitamin's Earnings Growth And 52% ROE

To begin with, Krynica Vitamin has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 8.1% which is quite remarkable. So, the substantial 34% net income growth seen by Krynica Vitamin over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Krynica Vitamin's growth is quite high when compared to the industry average growth of 5.9% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Krynica Vitamin fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Krynica Vitamin Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 60% (implying that it keeps only 40% of profits) for Krynica Vitamin suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

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

Conclusion

On the whole, we feel that Krynica Vitamin's performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Up till now, we've only made a short study of the company's growth data. To gain further insights into Krynica Vitamin's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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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