Declining Stock and Decent Financials: Is The Market Wrong About Zaklad Budowy Maszyn ZREMB - Chojnice S.A. (WSE:ZRE)?

With its stock down 13% over the past week, it is easy to disregard Zaklad Budowy Maszyn ZREMB - Chojnice (WSE:ZRE). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Zaklad Budowy Maszyn ZREMB - Chojnice's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Zaklad Budowy Maszyn ZREMB - Chojnice

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Zaklad Budowy Maszyn ZREMB - Chojnice is:

3.7% = zł469k ÷ zł13m (Based on the trailing twelve months to September 2022).

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 PLN0.04 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Zaklad Budowy Maszyn ZREMB - Chojnice's Earnings Growth And 3.7% ROE

As you can see, Zaklad Budowy Maszyn ZREMB - Chojnice's ROE looks pretty weak. Even when compared to the industry average of 13%, the ROE figure is pretty disappointing. Zaklad Budowy Maszyn ZREMB - Chojnice was still able to see a decent net income growth of 11% over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Zaklad Budowy Maszyn ZREMB - Chojnice's reported growth was lower than the industry growth of 27% over the last few years, which is not something we like to see.

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). This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Zaklad Budowy Maszyn ZREMB - Chojnice is trading on a high P/E or a low P/E, relative to its industry.

Is Zaklad Budowy Maszyn ZREMB - Chojnice Using Its Retained Earnings Effectively?

Zaklad Budowy Maszyn ZREMB - Chojnice doesn't pay any dividend, meaning that all of its profits are being reinvested in the business, which explains the fair bit of earnings growth the company has seen.

Conclusion

Overall, we feel that Zaklad Budowy Maszyn ZREMB - Chojnice certainly does have some positive factors to consider. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. 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 Zaklad Budowy Maszyn ZREMB - Chojnice 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.