Is Asseco South Eastern Europe S.A.'s (WSE:ASE) Latest Stock Performance Being Led By Its Strong Fundamentals?

Asseco South Eastern Europe's (WSE:ASE) stock is up by 2.0% over the past month. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. In this article, we decided to focus on Asseco South Eastern Europe's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Asseco South Eastern Europe

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 Asseco South Eastern Europe is:

13% = zł118m ÷ zł913m (Based on the trailing twelve months to December 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each PLN1 of shareholders' capital it has, the company made PLN0.13 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Asseco South Eastern Europe's Earnings Growth And 13% ROE

To start with, Asseco South Eastern Europe's ROE looks acceptable. Yet, the fact that the company's ROE is lower than the industry average of 17% does temper our expectations. That being the case, the significant five-year 21% net income growth reported by Asseco South Eastern Europe comes as a pleasant surprise. We reckon that there could be other factors at play here. 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. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this also does lend some color to the high earnings growth seen by the company.

We then performed a comparison between Asseco South Eastern Europe's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 24% in the same period.

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). This then helps them determine if the stock is placed for a bright or bleak future. What is ASE worth today? The intrinsic value infographic in our free research report helps visualize whether ASE is currently mispriced by the market.

Is Asseco South Eastern Europe Efficiently Re-investing Its Profits?

Asseco South Eastern Europe's three-year median payout ratio is a pretty moderate 41%, meaning the company retains 59% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Asseco South Eastern Europe is reinvesting its earnings efficiently.

Additionally, Asseco South Eastern Europe has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 40%. Accordingly, forecasts suggest that Asseco South Eastern Europe's future ROE will be 14% which is again, similar to the current ROE.

Conclusion

On the whole, we feel that Asseco South Eastern Europe's performance has been quite good. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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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