Has Open joint stock company Solikamsk magnesium works (MCX:MGNZ) Stock's Recent Performance Got Anything to Do With Its Financial Health?

By
Simply Wall St
Published
May 24, 2021
MISX:MGNZ
Source: Shutterstock

Solikamsk magnesium works' (MCX:MGNZ) stock is up by 7.8% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Solikamsk magnesium works' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Solikamsk magnesium works

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 Solikamsk magnesium works is:

10% = ₽358m ÷ ₽3.5b (Based on the trailing twelve months to December 2020).

The 'return' is the profit over the last twelve months. That means that for every RUB1 worth of shareholders' equity, the company generated RUB0.10 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 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 Solikamsk magnesium works' Earnings Growth And 10% ROE

When you first look at it, Solikamsk magnesium works' ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 10%. Particularly, the exceptional 29% net income growth seen by Solikamsk magnesium works over the past five years is pretty remarkable. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

Given that the industry shrunk its earnings at a rate of 0.4% in the same period, the net income growth of the company is quite impressive.

past-earnings-growth
MISX:MGNZ Past Earnings Growth May 25th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Solikamsk magnesium works fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Solikamsk magnesium works Making Efficient Use Of Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. This is likely what's driving the high earnings growth number discussed above.

Summary

In total, it does look like Solikamsk magnesium works has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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 Solikamsk magnesium works visit our risks dashboard for free.

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