Is MakoLab Spólka Akcyjna's(WSE:MLB) Recent Stock Performance Tethered To Its Strong Fundamentals?

MakoLab Spólka Akcyjna's (WSE:MLB) stock is up by a considerable 11% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on MakoLab Spólka Akcyjna's ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for MakoLab 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 MakoLab Spólka Akcyjna is:

24% = zł4.8m ÷ zł20m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. That means that for every PLN1 worth of shareholders' equity, the company generated PLN0.24 in profit.

Why Is ROE Important For 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

MakoLab Spólka Akcyjna's Earnings Growth And 24% ROE

First thing first, we like that MakoLab Spólka Akcyjna has an impressive ROE. Further, even comparing with the industry average if 23%, the company's ROE is quite respectable. As a result, MakoLab Spólka Akcyjna's remarkable 25% net income growth seen over the past 5 years is likely aided by its high ROE.

Next, on comparing with the industry net income growth, we found that MakoLab Spólka Akcyjna's growth is quite high when compared to the industry average growth of 16% in the same period, which is great to see.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is MakoLab Spólka Akcyjna fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is MakoLab Spólka Akcyjna Efficiently Re-investing Its Profits?

MakoLab Spólka Akcyjna's ' three-year median payout ratio is on the lower side at 7.1% implying that it is retaining a higher percentage (93%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Besides, MakoLab Spólka Akcyjna has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, we are pretty happy with MakoLab Spólka Akcyjna'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 will have the 1 risk we have identified for MakoLab Spólka Akcyjna.

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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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