Master Pharm SA's (WSE:MPH) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

By
Simply Wall St
Published
August 17, 2021
WSE:MPH
Source: Shutterstock

Master Pharm (WSE:MPH) has had a great run on the share market with its stock up by a significant 13% over the last three months. 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. Specifically, we decided to study Master Pharm'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. 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 Master Pharm

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Master Pharm is:

0.9% = zł841k ÷ zł95m (Based on the trailing twelve months to March 2021).

The 'return' is the yearly profit. Another way to think of that is that for every PLN1 worth of equity, the company was able to earn PLN0.01 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Master Pharm's Earnings Growth And 0.9% ROE

It is hard to argue that Master Pharm's ROE is much good in and of itself. Not just that, even compared to the industry average of 11%, the company's ROE is entirely unremarkable. As a result, Master Pharm's flat earnings over the past five years doesn't come as a surprise given its lower ROE.

We then compared Master Pharm's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 16% in the same period, which is a bit concerning.

past-earnings-growth
WSE:MPH Past Earnings Growth August 18th 2021

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Master Pharm's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Master Pharm Using Its Retained Earnings Effectively?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

In total, we're a bit ambivalent about Master Pharm'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. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Master Pharm's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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