Carbon Studio Spólka Akcyjna (WSE:CRB) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

By
Simply Wall St
Published
February 18, 2022
WSE:CRB
Source: Shutterstock

With its stock down 24% over the past three months, it is easy to disregard Carbon Studio Spólka Akcyjna (WSE:CRB). 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. Specifically, we decided to study Carbon Studio Spólka Akcyjna'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.

See our latest analysis for Carbon Studio Spólka Akcyjna

How To Calculate Return On Equity?

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 Carbon Studio Spólka Akcyjna is:

7.6% = zł803k ÷ zł11m (Based on the trailing twelve months to December 2021).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every PLN1 of its shareholder's investments, the company generates a profit of PLN0.08.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Carbon Studio Spólka Akcyjna's Earnings Growth And 7.6% ROE

When you first look at it, Carbon Studio Spólka Akcyjna's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 25% either. Despite this, surprisingly, Carbon Studio Spólka Akcyjna saw an exceptional 43% net income growth over the past five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Carbon Studio Spólka Akcyjna's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 43% in the same period.

past-earnings-growth
WSE:CRB Past Earnings Growth February 18th 2022

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. If you're wondering about Carbon Studio Spólka Akcyjna's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Carbon Studio Spólka Akcyjna Using Its Retained Earnings Effectively?

Carbon Studio Spólka Akcyjna doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Summary

In total, it does look like Carbon Studio Spólka Akcyjna has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. 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 5 risks we have identified for Carbon Studio Spólka Akcyjna visit our risks dashboard for free.

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