Asseco Poland S.A. (WSE:ACP) On An Uptrend: Could Fundamentals Be Driving The Stock?

Most readers would already know that Asseco Poland's (WSE:ACP) stock increased by 5.5% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Asseco Poland's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Asseco Poland

How Do You Calculate Return On Equity?

Return on equity 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 Asseco Poland is:

14% = zł1.3b ÷ zł9.0b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. So, this means that for every PLN1 of its shareholder's investments, the company generates a profit of PLN0.14.

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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Asseco Poland's Earnings Growth And 14% ROE

At first glance, Asseco Poland seems to have a decent ROE. Even when compared to the industry average of 17% the company's ROE looks quite decent. This certainly adds some context to Asseco Poland's moderate 8.4% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Asseco Poland's reported growth was lower than the industry growth of 19% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. 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 Asseco Poland fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Asseco Poland Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 58% (or a retention ratio of 42%) for Asseco Poland suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Asseco Poland is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 49% of its profits over the next three years. Regardless, Asseco Poland's ROE is speculated to decline to 10% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we feel that Asseco Poland certainly does have some positive factors to consider. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.