Is The Market Rewarding Publichnoe Akcionernoe Obshestvo "Kostromskaya Sbytovaya Compania" (MCX:KTSB) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?

With its stock down 17% over the past three months, it is easy to disregard Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania (MCX:KTSB). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Particularly, we will be paying attention to Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania's ROE today.

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.

View our latest analysis for Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania

How Do You Calculate Return On Equity?

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 Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania is:

6.3% = ₽36m ÷ ₽567m (Based on the trailing twelve months to September 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 RUB0.06 in profit.

What Has ROE Got To Do With 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 Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania's Earnings Growth And 6.3% ROE

It is hard to argue that Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania's ROE is much good in and of itself. Even compared to the average industry ROE of 10%, the company's ROE is quite dismal. Accordingly, Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania's low net income growth of 4.9% over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 18% in the same period.

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). This then helps them determine if the stock is placed for a bright or bleak future. 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 Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania is trading on a high P/E or a low P/E, relative to its industry.

Is Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania Using Its Retained Earnings Effectively?

Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania doesn't pay any dividend, which means that it is retaining all of its earnings. However, this doesn't explain the low earnings growth the company has seen. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Conclusion

On the whole, we feel that the performance shown by Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 2 risks we have identified for Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania by visiting our risks dashboard for free on our platform here.

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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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