CreativeForge Games S.A.'s (WSE:CFG) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

CreativeForge Games (WSE:CFG) has had a great run on the share market with its stock up by a significant 51% over the last month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on CreativeForge Games' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for CreativeForge Games

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 CreativeForge Games is:

8.9% = zł704k ÷ zł7.9m (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every PLN1 of its shareholder's investments, the company generates a profit of PLN0.09.

What Is The Relationship Between ROE And Earnings Growth?

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

CreativeForge Games' Earnings Growth And 8.9% ROE

At first glance, CreativeForge Games' ROE doesn't look very promising. Next, when compared to the average industry ROE of 23%, the company's ROE leaves us feeling even less enthusiastic. Despite this, surprisingly, CreativeForge Games saw an exceptional 62% net income growth over the past five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared CreativeForge Games' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 23%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 CreativeForge Games is trading on a high P/E or a low P/E, relative to its industry.

Is CreativeForge Games Using Its Retained Earnings Effectively?

Conclusion

On the whole, we do feel that CreativeForge Games has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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. To know the 4 risks we have identified for CreativeForge Games visit our risks dashboard for free.

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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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