Is Societatea Comerciala Compania Hoteliera Intercontinental Romania S.A.'s (BVB:RCHI) Stock Price Struggling As A Result Of Its Mixed Financials?

It is hard to get excited after looking at Societatea Comerciala Compania Hoteliera Intercontinental Romania's (BVB:RCHI) recent performance, when its stock has declined 15% over the past three months. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Societatea Comerciala Compania Hoteliera Intercontinental Romania's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Societatea Comerciala Compania Hoteliera Intercontinental Romania

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 Societatea Comerciala Compania Hoteliera Intercontinental Romania is:

6.5% = RON7.8m ÷ RON119m (Based on the trailing twelve months to June 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each RON1 of shareholders' capital it has, the company made RON0.07 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Societatea Comerciala Compania Hoteliera Intercontinental Romania's Earnings Growth And 6.5% ROE

It is quite clear that Societatea Comerciala Compania Hoteliera Intercontinental Romania's ROE is rather low. Even when compared to the industry average of 8.3%, the ROE figure is pretty disappointing. Therefore, it might not be wrong to say that the five year net income decline of 21% seen by Societatea Comerciala Compania Hoteliera Intercontinental Romania was possibly a result of it having a lower ROE. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

However, when we compared Societatea Comerciala Compania Hoteliera Intercontinental Romania's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 16% in the same period. This is quite worrisome.

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). This then helps them determine if the stock is placed for a bright or bleak future. Is Societatea Comerciala Compania Hoteliera Intercontinental Romania fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Societatea Comerciala Compania Hoteliera Intercontinental Romania Making Efficient Use Of Its Profits?

Societatea Comerciala Compania Hoteliera Intercontinental Romania doesn't pay any dividend, meaning that potentially all of its profits are being reinvested in the business, which doesn't explain why the company's earnings have shrunk if it is retaining all of its profits. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Summary

In total, we're a bit ambivalent about Societatea Comerciala Compania Hoteliera Intercontinental Romania's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 3 risks we have identified for Societatea Comerciala Compania Hoteliera Intercontinental Romania.

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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.