Big Cheese Studio Spolka Akcyjna's (WSE:BCS) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

With its stock down 27% over the past month, it is easy to disregard Big Cheese Studio Spolka Akcyjna (WSE:BCS). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Big Cheese Studio Spolka Akcyjna's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Big Cheese Studio Spolka Akcyjna

How Is ROE Calculated?

Return on equity 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 Big Cheese Studio Spolka Akcyjna is:

16% = zł3.7m ÷ zł24m (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. That means that for every PLN1 worth of shareholders' equity, the company generated PLN0.16 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.

Big Cheese Studio Spolka Akcyjna's Earnings Growth And 16% ROE

To start with, Big Cheese Studio Spolka Akcyjna's ROE looks acceptable. Even when compared to the industry average of 14% the company's ROE looks quite decent. As you might expect, the 14% net income decline reported by Big Cheese Studio Spolka Akcyjna is a bit of a surprise. So, there might be some other aspects that could explain this. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

However, when we compared Big Cheese Studio Spolka Akcyjna's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 11% in the same period. This is quite worrisome.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Big Cheese Studio Spolka Akcyjna's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Big Cheese Studio Spolka Akcyjna Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 88% (implying that 12% of the profits are retained), most of Big Cheese Studio Spolka Akcyjna's profits are being paid to shareholders, which explains the company's shrinking earnings. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. To know the 6 risks we have identified for Big Cheese Studio Spolka Akcyjna visit our risks dashboard for free.

In addition, Big Cheese Studio Spolka Akcyjna only recently started paying a dividend so the management probably decided the shareholders prefer dividends even though earnings have been shrinking.

Summary

In total, it does look like Big Cheese Studio Spolka Akcyjna has some positive aspects to its business. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. 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 Big Cheese Studio Spolka Akcyjna'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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com