Are Strong Financial Prospects The Force That Is Driving The Momentum In Cognor Holding S.A.'s WSE:COG) Stock?

Cognor Holding's (WSE:COG) stock is up by a considerable 11% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Cognor Holding'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Cognor Holding

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 Cognor Holding is:

29% = zł361m ÷ zł1.2b (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. That means that for every PLN1 worth of shareholders' equity, the company generated PLN0.29 in profit.

Why Is ROE Important For 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.

Cognor Holding's Earnings Growth And 29% ROE

First thing first, we like that Cognor Holding has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 6.0% which is quite remarkable. So, the substantial 54% net income growth seen by Cognor Holding over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Cognor Holding's growth is quite high when compared to the industry average growth of 20% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Cognor Holding fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Cognor Holding Using Its Retained Earnings Effectively?

Cognor Holding's three-year median payout ratio to shareholders is 22%, which is quite low. This implies that the company is retaining 78% of its profits. So it looks like Cognor Holding is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Cognor Holding has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 29% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 7.8% over the same period.

Conclusion

On the whole, we feel that Cognor Holding's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.