Is Weakness In CETIS, Graphic and Documentation Services, d.d. (LJSE:CETG) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

CETIS Graphic and Documentation Services d.d (LJSE:CETG) has had a rough three months with its share price down 25%. 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 CETIS Graphic and Documentation Services d.d's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for CETIS Graphic and Documentation Services d.d

How Do You 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 CETIS Graphic and Documentation Services d.d is:

29% = €19m ÷ €66m (Based on the trailing twelve months to December 2022).

The 'return' is the yearly profit. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.29 in profit.

What Is The Relationship Between ROE And 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. 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.

CETIS Graphic and Documentation Services d.d's Earnings Growth And 29% ROE

First thing first, we like that CETIS Graphic and Documentation Services d.d has an impressive ROE. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. So, the substantial 40% net income growth seen by CETIS Graphic and Documentation Services d.d over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that CETIS Graphic and Documentation Services d.d's growth is quite high when compared to the industry average growth of 18% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is CETIS Graphic and Documentation Services d.d fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is CETIS Graphic and Documentation Services d.d Using Its Retained Earnings Effectively?

The three-year median payout ratio for CETIS Graphic and Documentation Services d.d is 31%, which is moderately low. The company is retaining the remaining 69%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like CETIS Graphic and Documentation Services d.d is reinvesting its earnings efficiently.

Moreover, CETIS Graphic and Documentation Services d.d is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend.

Conclusion

Overall, we are quite pleased with CETIS Graphic and Documentation Services d.d's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial 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 3 risks we have identified for CETIS Graphic and Documentation Services d.d 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.