Is Weakness In PJSC Russian Aquaculture (MCX:AQUA) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

It is hard to get excited after looking at PJSC Russian Aquaculture's (MCX:AQUA) recent performance, when its stock has declined 6.0% over the past month. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on PJSC Russian Aquaculture'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for PJSC Russian Aquaculture

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 PJSC Russian Aquaculture is:

22% = ₽1.8b ÷ ₽8.6b (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. Another way to think of that is that for every RUB1 worth of equity, the company was able to earn RUB0.22 in profit.

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of PJSC Russian Aquaculture's Earnings Growth And 22% ROE

At first glance, PJSC Russian Aquaculture seems to have a decent ROE. On comparing with the average industry ROE of 8.1% the company's ROE looks pretty remarkable. This certainly adds some context to PJSC Russian Aquaculture's exceptional 47% net income growth seen over the past five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that PJSC Russian Aquaculture's growth is quite high when compared to the industry average growth of 4.1% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if PJSC Russian Aquaculture is trading on a high P/E or a low P/E, relative to its industry.

Is PJSC Russian Aquaculture Using Its Retained Earnings Effectively?

PJSC Russian Aquaculture has a really low three-year median payout ratio of 16%, meaning that it has the remaining 84% left over to reinvest into its business. So it looks like PJSC Russian Aquaculture is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Conclusion

On the whole, we feel that PJSC Russian Aquaculture's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard would have the 3 risks we have identified for PJSC Russian Aquaculture.

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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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