PCC Rokita SA's (WSE:PCR) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?

By
Simply Wall St
Published
March 09, 2021
WSE:PCR
Source: Shutterstock

Most readers would already be aware that PCC Rokita's (WSE:PCR) stock increased significantly by 25% over the past 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. Particularly, we will be paying attention to PCC Rokita'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for PCC Rokita

How Is ROE Calculated?

ROE 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 PCC Rokita is:

10% = zł73m ÷ zł728m (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 PLN0.10 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

PCC Rokita's Earnings Growth And 10% ROE

At first glance, PCC Rokita's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 8.6%, we may spare it some thought. But then again, PCC Rokita's five year net income shrunk at a rate of 2.1%. Bear in mind, the company does have a slightly low ROE. Hence, this goes some way in explaining the shrinking earnings.

We then compared PCC Rokita's performance with the industry and found that the company has shrunk its earnings at a slower rate than the industry earnings which has seen its earnings shrink by 9.2% in the same period. This does offer shareholders some relief

past-earnings-growth
WSE:PCR Past Earnings Growth March 9th 2021

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is PCC Rokita fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is PCC Rokita Making Efficient Use Of Its Profits?

PCC Rokita'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 82% (or a retention ratio of 18%). With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 4 risks we have identified for PCC Rokita by visiting our risks dashboard for free on our platform here.

In addition, PCC Rokita has been paying dividends over a period of six years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Summary

In total, we would have a hard think before deciding on any investment action concerning PCC Rokita. 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. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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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