Bioerg Spólka Akcyjna's (WSE:BER) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Bioerg Spólka Akcyjna's (WSE:BER) stock is up by a considerable 30% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study Bioerg Spólka Akcyjna's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Bioerg Spólka Akcyjna

How Do You 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 Bioerg Spólka Akcyjna is:

6.3% = zł823k ÷ zł13m (Based on the trailing twelve months to September 2020).

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 PLN0.06 in profit.

Why Is ROE Important For 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.

A Side By Side comparison of Bioerg Spólka Akcyjna's Earnings Growth And 6.3% ROE

On the face of it, Bioerg Spólka Akcyjna's ROE is not much to talk about. However, its ROE is similar to the industry average of 7.0%, so we won't completely dismiss the company. But Bioerg Spólka Akcyjna saw a five year net income decline of 6.1% over the past five years. Remember, the company's ROE is a bit low to begin with. Hence, this goes some way in explaining the shrinking earnings.

So, as a next step, we compared Bioerg Spólka Akcyjna's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 30% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Bioerg Spólka Akcyjna fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Bioerg Spólka Akcyjna Making Efficient Use Of Its Profits?

Conclusion

On the whole, we feel that the performance shown by Bioerg Spólka Akcyjna can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 4 risks we have identified for Bioerg 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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