Vakomtek Inc (WSE:VKT) had a difficult month with its share price down 24%. However, a closer look at his healthy finances might make you think again. Since fundamentals generally determine long-term market outcomes, the company is worth looking into. In particular, we will pay attention to Vakomtek’s ROE today.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
See our latest analysis for Vakomtek
How is ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Vakomtek is:
13% = 871,000 zł ÷ 6.6 million zł (based on the last twelve months until March 2022).
The “yield” is the profit of the last twelve months. Another way to think about this is that for every 1 PLN worth of equity, the company was able to make a profit of 0.13 PLN.
What does ROE have to do with earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
Vakomtek profit growth and 13% ROE
At first glance, Vakomtek seems to have a decent ROE. Regardless, the company’s ROE is still well below the industry average of 18%. That said, the significant net income growth of 40% over five years reported by Vakomtek is a pleasant surprise. We believe there could be other aspects that positively influence the company’s earnings growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio. Keep in mind that the company has a respectable ROE. It’s just that the industry’s ROE is higher. So that also gives some color to the strong earnings growth the company is seeing.
We then performed a comparison between Vakomtek’s net income growth and that of the industry, which revealed that the company’s growth is similar to the average industry growth of 35% over the same period. period.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. Is Vakomtek correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Does Vakomtek effectively reinvest its profits?
Vakomtek does not pay any dividends to its shareholders, which means that the company has reinvested all of its profits back into the business. This is probably what explains the strong earnings growth discussed above.
Overall, we’re pretty happy with Vakomtek’s performance. In particular, we appreciate the fact that the company reinvests heavily in its business at a moderate rate of return. Unsurprisingly, this led to impressive earnings growth. If the company continues to increase earnings as it has, it could have a positive impact on its share price given how earnings per share influence prices over the long term. Remember that the price of a stock also depends on the perceived risk. Therefore, investors should be aware of the risks involved before investing in a company. Our risk dashboard would have the 4 risks we identified for Vakomtek.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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