Kovrov Mechanical Plant, Public Joint-Stock Company's (MCX:KMEZ) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Most readers would already be aware that Kovrov Mechanical Plant's (MCX:KMEZ) stock increased significantly by 16% over the past 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 an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Kovrov Mechanical Plant

How Is ROE Calculated?

Return on equity 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 Kovrov Mechanical Plant is:

5.0% = ₽211m ÷ ₽4.2b (Based on the trailing twelve months to June 2021).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every RUB1 of its shareholder's investments, the company generates a profit of RUB0.05.

What Is The Relationship Between ROE And 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Kovrov Mechanical Plant's Earnings Growth And 5.0% ROE

It is quite clear that Kovrov Mechanical Plant's ROE is rather low. Even compared to the average industry ROE of 11%, the company's ROE is quite dismal. Despite this, surprisingly, Kovrov Mechanical Plant saw an exceptional 37% net income growth over the past five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then performed a comparison between Kovrov Mechanical Plant's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 40% 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. Doing so will help them establish if the stock's future looks promising or ominous. 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?

Kovrov Mechanical Plant doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Conclusion

Overall, we feel that Kovrov Mechanical Plant certainly does have some positive factors to consider. 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. To know the 1 risk we have identified for Kovrov Mechanical Plant visit our risks dashboard for free.

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.

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