Can Mixed Fundamentals Have A Negative Impact on Centrum Medyczne ENEL-MED S.A. (WSE:ENE) Current Share Price Momentum?

Centrum Medyczne ENEL-MED's (WSE:ENE) stock is up by a considerable 39% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to Centrum Medyczne ENEL-MED's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Centrum Medyczne ENEL-MED

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 Centrum Medyczne ENEL-MED is:

4.2% = zł4.2m ÷ zł101m (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. That means that for every PLN1 worth of shareholders' equity, the company generated PLN0.04 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. 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.

A Side By Side comparison of Centrum Medyczne ENEL-MED's Earnings Growth And 4.2% ROE

It is quite clear that Centrum Medyczne ENEL-MED's ROE is rather low. Even compared to the average industry ROE of 13%, the company's ROE is quite dismal. For this reason, Centrum Medyczne ENEL-MED's five year net income decline of 27% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

However, when we compared Centrum Medyczne ENEL-MED's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 2.8% in the same period. This is quite worrisome.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Centrum Medyczne ENEL-MED's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Centrum Medyczne ENEL-MED Making Efficient Use Of Its Profits?

Centrum Medyczne ENEL-MED doesn't pay any dividend, meaning that the company is keeping all of its profits, which makes us wonder why it is retaining its earnings if it can't use them to grow its business. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Summary

In total, we're a bit ambivalent about Centrum Medyczne ENEL-MED's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 2 risks we have identified for Centrum Medyczne ENEL-MED by visiting our risks dashboard for free on our platform here.

When trading Centrum Medyczne ENEL-MED or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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