Has Cyfrowe Centrum Serwisowe Spólka Akcyjna's (WSE:CCS) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Cyfrowe Centrum Serwisowe Spólka Akcyjna (WSE:CCS) has had a great run on the share market with its stock up by a significant 51% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Cyfrowe Centrum Serwisowe Spólka Akcyjna's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Cyfrowe Centrum Serwisowe Spólka Akcyjna

How Is ROE Calculated?

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 Cyfrowe Centrum Serwisowe Spólka Akcyjna is:

20% = zł2.3m ÷ zł12m (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 PLN0.20 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Cyfrowe Centrum Serwisowe Spólka Akcyjna's Earnings Growth And 20% ROE

To start with, Cyfrowe Centrum Serwisowe Spólka Akcyjna's ROE looks acceptable. On comparing with the average industry ROE of 15% the company's ROE looks pretty remarkable. Needless to say, we are quite surprised to see that Cyfrowe Centrum Serwisowe Spólka Akcyjna's net income shrunk at a rate of 6.3% over the past five years. We reckon that there could be some other factors at play here that are preventing the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

That being said, we compared Cyfrowe Centrum Serwisowe Spólka Akcyjna's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 26% 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. Doing so will help them establish if the stock's future looks promising or ominous. Is Cyfrowe Centrum Serwisowe Spólka Akcyjna fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Cyfrowe Centrum Serwisowe Spólka Akcyjna Efficiently Re-investing Its Profits?

Summary

On the whole, we do feel that Cyfrowe Centrum Serwisowe Spólka Akcyjna has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. 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 3 risks we have identified for Cyfrowe Centrum Serwisowe Spólka Akcyjna visit our risks dashboard for free.

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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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