Powszechny Zaklad Ubezpieczen SA's (WSE:PZU) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

By
Simply Wall St
Published
May 11, 2022
WSE:PZU
Source: Shutterstock

Powszechny Zaklad Ubezpieczen (WSE:PZU) has had a rough three months with its share price down 20%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Powszechny Zaklad Ubezpieczen'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.

View our latest analysis for Powszechny Zaklad Ubezpieczen

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Powszechny Zaklad Ubezpieczen is:

14% = zł5.4b ÷ zł40b (Based on the trailing twelve months to December 2021).

The 'return' is the income the business earned over the last year. That means that for every PLN1 worth of shareholders' equity, the company generated PLN0.14 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.

Powszechny Zaklad Ubezpieczen's Earnings Growth And 14% ROE

At first glance, Powszechny Zaklad Ubezpieczen seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 9.6%. However, for some reason, the higher returns aren't reflected in Powszechny Zaklad Ubezpieczen's meagre five year net income growth average of 2.3%. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that Powszechny Zaklad Ubezpieczen's reported growth was lower than the industry growth of 8.0% in the same period, which is not something we like to see.

past-earnings-growth
WSE:PZU Past Earnings Growth May 11th 2022

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. 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 Powszechny Zaklad Ubezpieczen's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Powszechny Zaklad Ubezpieczen Making Efficient Use Of Its Profits?

Powszechny Zaklad Ubezpieczen has a three-year median payout ratio of 85% (implying that it keeps only 15% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.

Additionally, Powszechny Zaklad Ubezpieczen has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 74%. Accordingly, forecasts suggest that Powszechny Zaklad Ubezpieczen's future ROE will be 16% which is again, similar to the current ROE.

Summary

Overall, we feel that Powszechny Zaklad Ubezpieczen certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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