Will Weakness in Fabryka Farb i Lakierów Sniezka SA's (WSE:SKA) Stock Prove Temporary Given Strong Fundamentals?

With its stock down 6.0% over the past three months, it is easy to disregard Fabryka Farb i Lakierów Sniezka (WSE:SKA). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Fabryka Farb i Lakierów Sniezka'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.

View our latest analysis for Fabryka Farb i Lakierów Sniezka

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Fabryka Farb i Lakierów Sniezka is:

24% = zł80m ÷ zł340m (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every PLN1 worth of equity, the company was able to earn PLN0.24 in profit.

What Is The Relationship Between ROE And 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Fabryka Farb i Lakierów Sniezka's Earnings Growth And 24% ROE

To begin with, Fabryka Farb i Lakierów Sniezka has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 6.3% which is quite remarkable. This probably laid the groundwork for Fabryka Farb i Lakierów Sniezka's moderate 6.3% net income growth seen over the past five years.

When you consider the fact that the industry earnings have shrunk at a rate of 9.2% in the same period, the company's net income growth is pretty remarkable.

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. 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 Fabryka Farb i Lakierów Sniezka's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Fabryka Farb i Lakierów Sniezka Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 50% (or a retention ratio of 50%) for Fabryka Farb i Lakierów Sniezka suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Fabryka Farb i Lakierów Sniezka is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

On the whole, we feel that Fabryka Farb i Lakierów Sniezka's performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Fabryka Farb i Lakierów Sniezka'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. 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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