Are Robust Financials Driving The Recent Rally In 11 bit studios S.A.'s (WSE:11B) Stock?

Most readers would already be aware that 11 bit studios' (WSE:11B) stock increased significantly by 6.3% over the past month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to 11 bit studios' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for 11 bit studios

How To 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 11 bit studios is:

28% = zł45m ÷ zł159m (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each PLN1 of shareholders' capital it has, the company made PLN0.28 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of 11 bit studios' Earnings Growth And 28% ROE

First thing first, we like that 11 bit studios has an impressive ROE. Even when compared to the industry average of 24% the company's ROE is pretty decent. Therefore, it might not be wrong to say that the impressive five year 30% net income growth seen by 11 bit studios was probably achieved as a result of the high ROE.

Next, on comparing 11 bit studios' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 30% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about 11 bit studios''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is 11 bit studios Using Its Retained Earnings Effectively?

Conclusion

Overall, we are quite pleased with 11 bit studios' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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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