Public Joint Stock Company Magadanenergo's (MCX:MAGE) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

By
Simply Wall St
Published
February 22, 2022
MISX:MAGE
Source: Shutterstock

With its stock down 26% over the past three months, it is easy to disregard Magadanenergo (MCX:MAGE). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Magadanenergo's ROE in this article.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Magadanenergo

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 Magadanenergo is:

31% = ₽930m ÷ ₽3.0b (Based on the trailing twelve months to June 2021).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every RUB1 of its shareholder's investments, the company generates a profit of RUB0.31.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Magadanenergo's Earnings Growth And 31% ROE

Firstly, we acknowledge that Magadanenergo has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 9.8% which is quite remarkable. Under the circumstances, Magadanenergo's considerable five year net income growth of 44% was to be expected.

As a next step, we compared Magadanenergo's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 6.9%.

past-earnings-growth
MISX:MAGE Past Earnings Growth February 22nd 2022

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Magadanenergo's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Magadanenergo Making Efficient Use Of Its Profits?

Magadanenergo doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Conclusion

Overall, we are quite pleased with Magadanenergo's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 5 risks we have identified for Magadanenergo by visiting our risks dashboard for free on our platform here.

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