The Farm 51 Group Spólka Akcyjna's (WSE:F51) Stock Is Going Strong: Is the Market Following Fundamentals?

Farm 51 Group Spólka Akcyjna (WSE:F51) has had a great run on the share market with its stock up by a significant 43% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Farm 51 Group Spólka Akcyjna's ROE in this article.

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 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:

28% = zł3.6m ÷ zł13m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. That means that for every PLN1 worth of shareholders' equity, the company generated PLN0.28 in profit.

What Is The Relationship Between ROE And 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 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 28% ROE

First thing first, we like that Farm 51 Group Spólka Akcyjna has an impressive ROE. Additionally, a comparison with the average industry ROE of 24% also portrays the company's ROE in a good light. As a result, Farm 51 Group Spólka Akcyjna's remarkable 32% net income growth seen over the past 5 years is likely aided by its high ROE.

We then performed a comparison between Farm 51 Group Spólka Akcyjna's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 30% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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?

Conclusion

On the whole, we feel that Farm 51 Group Spólka Akcyjna's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard would have the 4 risks we have identified for Farm 51 Group Spólka Akcyjna.

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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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