Public Joint Stock Company Novorossyisk Grain Plant's (MCX:NKHP) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Novorossyisk Grain Plant's (MCX:NKHP) stock is up by a considerable 47% over the past three months. 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 Novorossyisk Grain Plant's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 Novorossyisk Grain Plant

How To 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 Novorossyisk Grain Plant is:

18% = ₽1.4b ÷ ₽7.6b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every RUB1 worth of equity, the company was able to earn RUB0.18 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Novorossyisk Grain Plant's Earnings Growth And 18% ROE

To begin with, Novorossyisk Grain Plant seems to have a respectable ROE. On comparing with the average industry ROE of 7.3% the company's ROE looks pretty remarkable. However, we are curious as to how the high returns still resulted in flat growth for Novorossyisk Grain Plant in the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

We then compared Novorossyisk Grain Plant's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 3.2% in the same period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Novorossyisk Grain Plant fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Novorossyisk Grain Plant Using Its Retained Earnings Effectively?

In spite of a normal three-year median payout ratio of 49% (or a retention ratio of 51%), Novorossyisk Grain Plant hasn't seen much growth in its earnings. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Moreover, Novorossyisk Grain Plant has been paying dividends for five years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

On the whole, we do feel that Novorossyisk Grain Plant has some positive attributes. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Novorossyisk Grain Plant's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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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