Grupa Azoty Zaklady Chemiczne Police S.A.'s (WSE:PCE) Has Performed Well But Fundamentals Look Varied: Is There A Clear Direction For The Stock?

Grupa Azoty Zaklady Chemiczne Police's (WSE:PCE) stock up by 1.6% over the past three months. Given that the stock prices usually follow long-term business performance, we wonder if the company's mixed financials could have any adverse effect on its current price price movement Specifically, we decided to study Grupa Azoty Zaklady Chemiczne Police's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Grupa Azoty Zaklady Chemiczne Police

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 Grupa Azoty Zaklady Chemiczne Police is:

2.1% = zł46m ÷ zł2.2b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each PLN1 of shareholders' capital it has, the company made PLN0.02 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 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.

A Side By Side comparison of Grupa Azoty Zaklady Chemiczne Police's Earnings Growth And 2.1% ROE

It is hard to argue that Grupa Azoty Zaklady Chemiczne Police's ROE is much good in and of itself. Even compared to the average industry ROE of 8.6%, the company's ROE is quite dismal. For this reason, Grupa Azoty Zaklady Chemiczne Police's five year net income decline of 39% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 9.2% in the same period, we still found Grupa Azoty Zaklady Chemiczne Police's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Grupa Azoty Zaklady Chemiczne Police's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Grupa Azoty Zaklady Chemiczne Police Making Efficient Use Of Its Profits?

Because Grupa Azoty Zaklady Chemiczne Police doesn't pay any dividends, we infer that it is retaining all of its profits, which is rather perplexing when you consider the fact that there is no earnings growth to show for it. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Summary

In total, we're a bit ambivalent about Grupa Azoty Zaklady Chemiczne Police's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 2 risks we have identified for Grupa Azoty Zaklady Chemiczne Police.

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