SNGN Romgaz SA (BVB:SNG) On An Uptrend: Could Fundamentals Be Driving The Stock?

Most readers would already know that SNGN Romgaz's (BVB:SNG) stock increased by 8.2% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Specifically, we decided to study SNGN Romgaz's ROE in this article.

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.

View our latest analysis for SNGN Romgaz

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for SNGN Romgaz is:

24% = RON2.8b ÷ RON12b (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. That means that for every RON1 worth of shareholders' equity, the company generated RON0.24 in profit.

What Is The Relationship Between ROE And 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. 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.

A Side By Side comparison of SNGN Romgaz's Earnings Growth And 24% ROE

To begin with, SNGN Romgaz seems to have a respectable ROE. Especially when compared to the industry average of 16% the company's ROE looks pretty impressive. This certainly adds some context to SNGN Romgaz's exceptional 20% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared SNGN Romgaz's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 27% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for SNG? You can find out in our latest intrinsic value infographic research report.

Is SNGN Romgaz Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 53% (implying that it keeps only 47% of profits) for SNGN Romgaz suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, SNGN Romgaz has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 58% of its profits over the next three years. However, SNGN Romgaz's future ROE is expected to decline to 11% despite there being not much change anticipated in the company's payout ratio.

Conclusion

In total, it does look like SNGN Romgaz has some positive aspects to its business. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.