Has Izolacja Jarocin Spolka Akcyjna's (WSE:IZO) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Izolacja Jarocin Spolka Akcyjna (WSE:IZO) has had a great run on the share market with its stock up by a significant 44% over the last 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 Izolacja Jarocin Spolka Akcyjna'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.

See our latest analysis for Izolacja Jarocin Spolka Akcyjna

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 Izolacja Jarocin Spolka Akcyjna is:

11% = zł1.9m ÷ zł17m (Based on the trailing twelve months to March 2023).

The 'return' is the profit over the last twelve months. So, this means that for every PLN1 of its shareholder's investments, the company generates a profit of PLN0.11.

Why Is ROE Important For 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Izolacja Jarocin Spolka Akcyjna's Earnings Growth And 11% ROE

At first glance, Izolacja Jarocin Spolka Akcyjna's ROE doesn't look very promising. However, its ROE is similar to the industry average of 12%, so we won't completely dismiss the company. On the other hand, Izolacja Jarocin Spolka Akcyjna reported a moderate 19% net income growth over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

We then compared Izolacja Jarocin Spolka Akcyjna's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 15% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Izolacja Jarocin Spolka Akcyjna's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Izolacja Jarocin Spolka Akcyjna Using Its Retained Earnings Effectively?

Summary

In total, it does look like Izolacja Jarocin Spolka Akcyjna has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 4 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. 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.