Are Strong Financial Prospects The Force That Is Driving The Momentum In MFO Spólka Akcyjna's WSE:MFO) Stock?

By
Simply Wall St
Published
December 16, 2020

MFO Spólka Akcyjna (WSE:MFO) has had a great run on the share market with its stock up by a significant 27% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to MFO Spólka Akcyjna's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for MFO Spólka Akcyjna

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 MFO Spólka Akcyjna is:

12% = zł20m ÷ zł176m (Based on the trailing twelve months to September 2020).

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 PLN0.12.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

MFO Spólka Akcyjna's Earnings Growth And 12% ROE

To begin with, MFO Spólka Akcyjna seems to have a respectable ROE. On comparing with the average industry ROE of 7.5% the company's ROE looks pretty remarkable. This certainly adds some context to MFO Spólka Akcyjna's decent 13% net income growth seen over the past five years.

Next, on comparing MFO Spólka Akcyjna's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 12% in the same period.

WSE:MFO Past Earnings Growth December 16th 2020

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about MFO Spólka Akcyjna's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is MFO Spólka Akcyjna Using Its Retained Earnings Effectively?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

Overall, we are quite pleased with MFO Spólka 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. You can see the 2 risks we have identified for MFO Spólka 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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