Is Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP S.A.'s (WSE:KMP) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP's (WSE:KMP) stock is up by a considerable 12% 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. Particularly, we will be paying attention to Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP's ROE today.

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.

See our latest analysis for Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP

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 Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP is:

7.3% = zł5.7m ÷ zł77m (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every PLN1 worth of equity, the company was able to earn PLN0.07 in profit.

What Has ROE Got To Do With 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. 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.

A Side By Side comparison of Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP's Earnings Growth And 7.3% ROE

On the face of it, Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP's ROE is not much to talk about. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 14%. Despite this, surprisingly, Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP saw an exceptional 29% net income growth over the past five years. So, there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.6%.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP Using Its Retained Earnings Effectively?

The three-year median payout ratio for Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP is 42%, which is moderately low. The company is retaining the remaining 58%. By the looks of it, the dividend is well covered and Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

On the whole, we do feel that Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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 Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP 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.