SFD S.A.'s (WSE:SFD) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

SFD (WSE:SFD) has had a rough three months with its share price down 26%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to SFD's ROE today.

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.

See our latest analysis for SFD

How To 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 SFD is:

15% = zł7.0m ÷ zł48m (Based on the trailing twelve months to September 2023).

The 'return' refers to a company's earnings over the last year. That means that for every PLN1 worth of shareholders' equity, the company generated PLN0.15 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. 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.

SFD's Earnings Growth And 15% ROE

To begin with, SFD seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 15%. Consequently, this likely laid the ground for the impressive net income growth of 30% seen over the past five years by SFD. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

We then compared SFD's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 20% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about SFD's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is SFD Efficiently Re-investing Its Profits?

SFD has a really low three-year median payout ratio of 17%, meaning that it has the remaining 83% left over to reinvest into its business. So it looks like SFD is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Along with seeing a growth in earnings, SFD only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Summary

In total, we are pretty happy with SFD'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. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 2 risks we have identified for SFD.

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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.