Is The Farm 51 Group Spólka Akcyjna's (WSE:F51) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Farm 51 Group Spólka Akcyjna's (WSE:F51) stock increased significantly by 10% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Farm 51 Group Spólka Akcyjna's ROE.

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. 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 Farm 51 Group Spólka Akcyjna

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 Farm 51 Group Spólka Akcyjna is:

24% = zł4.9m ÷ zł20m (Based on the trailing twelve months to June 2023).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every PLN1 worth of equity, the company was able to earn PLN0.24 in profit.

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. 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 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.

Farm 51 Group Spólka Akcyjna's Earnings Growth And 24% ROE

Firstly, we acknowledge that Farm 51 Group Spólka Akcyjna has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 16% which is quite remarkable. As a result, Farm 51 Group Spólka Akcyjna's exceptional 57% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Farm 51 Group Spólka Akcyjna's 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 19%.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Farm 51 Group Spólka Akcyjna fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Farm 51 Group Spólka Akcyjna Making Efficient Use Of Its Profits?

Farm 51 Group Spólka Akcyjna doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Conclusion

In total, we are pretty happy with Farm 51 Group Spólka Akcyjna's 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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard would have the 3 risks we have identified for Farm 51 Group Spólka Akcyjna.

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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.