Fabrica de Scule Rasnov S.A.'s (BVB:FACY) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Fabrica de Scule Rasnov (BVB:FACY) has had a rough three months with its share price down 22%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Fabrica de Scule Rasnov's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

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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 Fabrica de Scule Rasnov is:

6.0% = RON1.7m ÷ RON28m (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each RON1 of shareholders' capital it has, the company made RON0.06 in profit.

Check out our latest analysis for Fabrica de Scule Rasnov

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. 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.

Fabrica de Scule Rasnov's Earnings Growth And 6.0% ROE

As you can see, Fabrica de Scule Rasnov's ROE looks pretty weak. An industry comparison shows that the company's ROE is not much different from the industry average of 5.3% either. However, the modest 17% net income growth seen by Fabrica de Scule Rasnov over the past five years is a positive sign. We reckon that there could also be other factors at play that are influencing the company's growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing Fabrica de Scule Rasnov's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 15% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Fabrica de Scule Rasnov fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Fabrica de Scule Rasnov Using Its Retained Earnings Effectively?

While Fabrica de Scule Rasnov has a three-year median payout ratio of 61% (which means it retains 39% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Moreover, Fabrica de Scule Rasnov 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.

Summary

Overall, we feel that Fabrica de Scule Rasnov certainly does have some positive factors to consider. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. 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 Fabrica de Scule Rasnov'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.