Can Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP S.A.'s (WSE:KMP) Weak Financials Pull The Plug On The Stock's Current Momentum On Its Share Price?

Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP (WSE:KMP) has had a great run on the share market with its stock up by a significant 22% over the last three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How Is ROE Calculated?

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 Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP is:

3.2% = zł2.4m ÷ zł76m (Based on the trailing twelve months to March 2025).

The 'return' is the yearly profit. One way to conceptualize this is that for each PLN1 of shareholders' capital it has, the company made PLN0.03 in profit.

See our latest analysis for Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP

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. 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.

Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP's Earnings Growth And 3.2% ROE

It is quite clear that Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP's ROE is rather low. Not just that, even compared to the industry average of 5.1%, the company's ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 6.9% seen by Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP over the last five years is not surprising. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

However, when we compared Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 8.2% in the same period. This is quite worrisome.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP is trading on a high P/E or a low P/E, relative to its industry.

Is Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP Efficiently Re-investing Its Profits?

Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 83% (or a retention ratio of 17%). With only very little left to reinvest into the business, growth in earnings is far from likely. To know the 5 risks we have identified for Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP visit our risks dashboard for free.

Moreover, Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP has been paying dividends for nine years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.

Conclusion

Overall, we would be extremely cautious before making any decision on Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.