Public Joint Stock Company Abrau-Durso's (MCX:ABRD) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

By
Simply Wall St
Published
February 22, 2022
MISX:ABRD
Source: Shutterstock

It is hard to get excited after looking at Abrau-Durso's (MCX:ABRD) recent performance, when its stock has declined 28% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Abrau-Durso's ROE.

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.

Check out our latest analysis for Abrau-Durso

How Do You 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 Abrau-Durso is:

15% = ₽1.5b ÷ ₽10b (Based on the trailing twelve months to June 2021).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each RUB1 of shareholders' capital it has, the company made RUB0.15 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Abrau-Durso's Earnings Growth And 15% ROE

At first glance, Abrau-Durso's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 10% doesn't go unnoticed by us. Especially when you consider Abrau-Durso's exceptional 21% net income growth over the past five years. Bear in mind, the company does have a moderately 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 the company belonging to a high growth industry.

As a next step, we compared Abrau-Durso's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 5.5%.

past-earnings-growth
MISX:ABRD Past Earnings Growth February 22nd 2022

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Abrau-Durso's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Abrau-Durso Making Efficient Use Of Its Profits?

Abrau-Durso has a three-year median payout ratio of 25% (where it is retaining 75% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Abrau-Durso is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Abrau-Durso has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, we are pretty happy with Abrau-Durso's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. 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. To know the 2 risks we have identified for Abrau-Durso visit our risks dashboard for free.

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