Partner-Nieruchomosci S.A. (WSE:PRN) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

By
Simply Wall St
Published
June 02, 2021
WSE:PRN
Source: Shutterstock

With its stock down 19% over the past three months, it is easy to disregard Partner-Nieruchomosci (WSE:PRN). 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 Partner-Nieruchomosci's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Partner-Nieruchomosci

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Partner-Nieruchomosci is:

3.1% = zł98k ÷ zł3.2m (Based on the trailing twelve months to March 2021).

The 'return' is the yearly profit. Another way to think of that is that for every PLN1 worth of equity, the company was able to earn PLN0.03 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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 Partner-Nieruchomosci's Earnings Growth And 3.1% ROE

It is quite clear that Partner-Nieruchomosci's ROE is rather low. Not just that, even compared to the industry average of 6.8%, the company's ROE is entirely unremarkable. Despite this, surprisingly, Partner-Nieruchomosci saw an exceptional 60% net income growth over the past five years. Therefore, there could be other reasons behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Partner-Nieruchomosci'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 15%.

past-earnings-growth
WSE:PRN Past Earnings Growth June 3rd 2021

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Partner-Nieruchomosci's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Partner-Nieruchomosci Using Its Retained Earnings Effectively?

Summary

Overall, we feel that Partner-Nieruchomosci certainly does have some positive factors to consider. 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. Our risks dashboard would have the 3 risks we have identified for Partner-Nieruchomosci.

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