Kovrov Mechanical Plant, Public Joint-Stock Company's (MCX:KMEZ) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Kovrov Mechanical Plant (MCX:KMEZ) has had a great run on the share market with its stock up by a significant 26% over the last month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Kovrov Mechanical Plant's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Kovrov Mechanical Plant

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Kovrov Mechanical Plant is:

0.7% = ₽27m ÷ ₽4.0b (Based on the trailing twelve months to December 2020).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every RUB1 worth of equity, the company was able to earn RUB0.01 in profit.

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. 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.

Kovrov Mechanical Plant's Earnings Growth And 0.7% ROE

It is quite clear that Kovrov Mechanical Plant's ROE is rather low. Even when compared to the industry average of 9.4%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Kovrov Mechanical Plant grew its net income at a significant rate of 28% in the last five years. We reckon that there could be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing Kovrov Mechanical Plant's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 33% 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. If you're wondering about Kovrov Mechanical Plant's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Kovrov Mechanical Plant Using Its Retained Earnings Effectively?

Conclusion

In total, it does look like Kovrov Mechanical Plant has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 3 risks we have identified for Kovrov Mechanical Plant 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. 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.
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