G-Energy S.A. (WSE:GNG) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

G-Energy's (WSE:GNG) stock is up by a considerable 12% over the past week. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study G-Energy's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for G-Energy

How To 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 G-Energy is:

4.1% = zł561k ÷ zł14m (Based on the trailing twelve months to June 2022).

The 'return' is the income the business earned over the last year. That means that for every PLN1 worth of shareholders' equity, the company generated PLN0.04 in profit.

What Is The Relationship Between ROE And 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.

G-Energy's Earnings Growth And 4.1% ROE

It is hard to argue that G-Energy's ROE is much good in and of itself. Even when compared to the industry average of 9.8%, the ROE figure is pretty disappointing. Hence, the flat earnings seen by G-Energy over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that G-Energy's earnings seems to be shrinking at a similar rate as the industry which shrunk at a rate of a rate of 1.0% in the same period.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is G-Energy fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is G-Energy Using Its Retained Earnings Effectively?

G-Energy doesn't pay any dividend, meaning that potentially all of its profits are being reinvested in the business. However, this doesn't explain why the company hasn't seen any growth. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Conclusion

Overall, we have mixed feelings about G-Energy. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of G-Energy's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.