S.C. Independenta S.A.'s (BVB:INTA) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that S.C. Independenta's (BVB:INTA) stock increased significantly by 22% over the past week. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to S.C. Independenta's ROE today.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for S.C. Independenta

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 S.C. Independenta is:

6.3% = RON2.4m ÷ RON39m (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each RON1 of shareholders' capital it has, the company made RON0.06 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

S.C. Independenta's Earnings Growth And 6.3% ROE

As you can see, S.C. Independenta's ROE looks pretty weak. However, when compared to the industry average of 4.0%, we do feel there's definitely more to the company. Even more so, after seeing S.C. Independenta's exceptional 33% net income growth over the past five years. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Hence, there might be some other aspects that are causing earnings to grow. Such as high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that S.C. Independenta's growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if S.C. Independenta is trading on a high P/E or a low P/E, relative to its industry.

Is S.C. Independenta Using Its Retained Earnings Effectively?

S.C. Independenta's three-year median payout ratio is a pretty moderate 45%, meaning the company retains 55% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like S.C. Independenta is reinvesting its earnings efficiently.

Conclusion

Overall, we are quite pleased with S.C. Independenta's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. 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. You can see the 3 risks we have identified for S.C. Independenta by visiting our risks dashboard for free on our platform here.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com