Are Strong Financial Prospects The Force That Is Driving The Momentum In Izolacja Jarocin Spolka Akcyjna's WSE:IZO) Stock?

Izolacja Jarocin Spolka Akcyjna (WSE:IZO) has had a great run on the share market with its stock up by a significant 63% over the last 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 Izolacja Jarocin Spolka Akcyjna's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Izolacja Jarocin Spolka Akcyjna

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 Izolacja Jarocin Spolka Akcyjna is:

12% = zł1.7m ÷ zł14m (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 PLN0.12 in profit.

Why Is ROE Important For Earnings Growth?

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

Izolacja Jarocin Spolka Akcyjna's Earnings Growth And 12% ROE

To start with, Izolacja Jarocin Spolka Akcyjna's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 9.0%. This probably laid the ground for Izolacja Jarocin Spolka Akcyjna's significant 21% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

We then performed a comparison between Izolacja Jarocin Spolka Akcyjna's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 21% in the same period.

Earnings growth is a huge factor in stock valuation. 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. Is Izolacja Jarocin Spolka Akcyjna fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Izolacja Jarocin Spolka Akcyjna Making Efficient Use Of Its Profits?

Summary

Overall, we are quite pleased with Izolacja Jarocin Spolka Akcyjna's performance. 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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 2 risks we have identified for Izolacja Jarocin Spolka Akcyjna by visiting our risks dashboard for free on our platform here.

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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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