Powszechny Zaklad Ubezpieczen SA's (WSE:PZU) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Powszechny Zaklad Ubezpieczen's (WSE:PZU) stock is up by a considerable 38% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Powszechny Zaklad Ubezpieczen

How To Calculate Return On Equity?

Return on equity 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 Powszechny Zaklad Ubezpieczen is:

7.3% = zł3.1b ÷ zł42b (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 PLN0.07 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Powszechny Zaklad Ubezpieczen's Earnings Growth And 7.3% ROE

When you first look at it, Powszechny Zaklad Ubezpieczen's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 9.5%, the company's ROE leaves us feeling even less enthusiastic. Although, we can see that Powszechny Zaklad Ubezpieczen saw a modest net income growth of 7.1% over the past five years. So, the growth in the company's earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing Powszechny Zaklad Ubezpieczen's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 6.2% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for PZU? You can find out in our latest intrinsic value infographic research report.

Is Powszechny Zaklad Ubezpieczen 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.

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 72%. However, Powszechny Zaklad Ubezpieczen's ROE is predicted to rise to 15% despite there being no anticipated change in its payout ratio.

Summary

On the whole, we do feel that Powszechny Zaklad Ubezpieczen has some positive attributes. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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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