Public Joint Stock Company Perm Energy Supplying Company's (MCX:PMSB) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that Perm Energy Supplying's (MCX:PMSB) stock increased significantly by 16% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Perm Energy Supplying's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Perm Energy Supplying

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Perm Energy Supplying is:

63% = ₽972m ÷ ₽1.5b (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. That means that for every RUB1 worth of shareholders' equity, the company generated RUB0.63 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. 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.

A Side By Side comparison of Perm Energy Supplying's Earnings Growth And 63% ROE

First thing first, we like that Perm Energy Supplying has an impressive ROE. Secondly, even when compared to the industry average of 10% the company's ROE is quite impressive. Under the circumstances, Perm Energy Supplying's considerable five year net income growth of 27% was to be expected.

As a next step, we compared Perm Energy Supplying'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 12%.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Perm Energy Supplying is trading on a high P/E or a low P/E, relative to its industry.

Is Perm Energy Supplying Using Its Retained Earnings Effectively?

Given that Perm Energy Supplying doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

Overall, we are quite pleased with Perm Energy Supplying's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 1 risk we have identified for Perm Energy Supplying visit our risks dashboard for free.

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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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