Is Public Joint Stock Company Nizhnekamskneftekhim's (MCX:NKNC) Stock On A Downtrend As A Result Of Its Poor Financials?

With its stock down 3.8% over the past month, it is easy to disregard Nizhnekamskneftekhim (MCX:NKNC). We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. In this article, we decided to focus on Nizhnekamskneftekhim's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Nizhnekamskneftekhim

How Do You Calculate Return On Equity?

ROE 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 Nizhnekamskneftekhim is:

10% = ₽14b ÷ ₽134b (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. That means that for every RUB1 worth of shareholders' equity, the company generated RUB0.10 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 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.

Nizhnekamskneftekhim's Earnings Growth And 10% ROE

When you first look at it, Nizhnekamskneftekhim's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 10.0%, so we won't completely dismiss the company. But Nizhnekamskneftekhim saw a five year net income decline of 3.6% over the past five years. Bear in mind, the company does have a slightly low ROE. Hence, this goes some way in explaining the shrinking earnings.

With the industry earnings declining at a rate of 3.6% in the same period, we deduce that both the company and the industry are shrinking at the same rate.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Nizhnekamskneftekhim is trading on a high P/E or a low P/E, relative to its industry.

Is Nizhnekamskneftekhim Making Efficient Use Of Its Profits?

Nizhnekamskneftekhim's high three-year median payout ratio of 131% suggests that the company is depleting its resources to keep up its dividend payments, and this shows in its shrinking earnings. Paying a dividend beyond their means is usually not viable over the long term. Our risks dashboard should have the 4 risks we have identified for Nizhnekamskneftekhim.

In addition, Nizhnekamskneftekhim has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

In total, we would have a hard think before deciding on any investment action concerning Nizhnekamskneftekhim. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Nizhnekamskneftekhim's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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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