Publichnoe Akcionernoe Obshestvo "Kostromskaya Sbytovaya Compania" (MCX:KTSB) Is Up But Financials Look Inconsistent: Which Way Is The Stock Headed?

Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania's (MCX:KTSB) stock up by 9.8% over the past three months. Given that the stock prices usually follow long-term business performance, we wonder if the company's mixed financials could have any adverse effect on its current price price movement Particularly, we will be paying attention to Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania's ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania

How Is ROE Calculated?

The formula for return on equity is:

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 income the business earned over the last year. Another way to think of that is that for every RUB1 worth of equity, the company was able to earn RUB0.06 in profit.

What Is The Relationship Between ROE And 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 Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania's Earnings Growth And 6.3% ROE

As you can see, Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania's ROE looks pretty weak. Even when compared to the industry average of 10%, the ROE figure is pretty disappointing. Therefore, the disappointing ROE therefore provides a background to Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania's very little net income growth of 4.9% over the past five years.

Next, on comparing with the industry net income growth, we found that Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania's reported growth was lower than the industry growth of 12% in the same period, which is not something we like 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 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 Making Efficient Use Of Its Profits?

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

Summary

Overall, we have mixed feelings about Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. 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. Our risks dashboard would have the 2 risks we have identified for Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania.

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