Przedsiebiorstwo Produkcyjno – Handlowe KOMPAP S.A.’s (WSE:KMP) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue? – Simply Wall St

Przedsiebiorstwo Produkcyjno – Handlowe KOMPAP (WSE:KMP) has had a great run on the share market with its stock up by a significant 15% over the last week. However, we wonder if the company’s inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study Przedsiebiorstwo Produkcyjno – Handlowe KOMPAP’s ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company’s success at turning shareholder investments into profits.

See our latest analysis for Przedsiebiorstwo Produkcyjno – Handlowe KOMPAP

How Is ROE Calculated?

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 Przedsiebiorstwo Produkcyjno – Handlowe KOMPAP is:

8.2% = zł5.8m ÷ zł70m (Based on the trailing twelve months to March 2021).

The ‘return’ is the income the business earned over the last year. One way to conceptualize this is that for each PLN1 of shareholders’ capital it has, the company made PLN0.08 in profit.

Why Is ROE Important For Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. 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.

Przedsiebiorstwo Produkcyjno – Handlowe KOMPAP’s Earnings Growth And 8.2% ROE

When you first look at it, Przedsiebiorstwo Produkcyjno – Handlowe KOMPAP’s ROE doesn’t look that attractive. However, given that the company’s ROE is similar to the average industry ROE of 7.1%, we may spare it some thought. But then again, Przedsiebiorstwo Produkcyjno – Handlowe KOMPAP’s five year net income shrunk at a rate of 2.8%. Bear in mind, the company does have a slightly low ROE. Therefore, the decline in earnings could also be the result of this.

We then compared Przedsiebiorstwo Produkcyjno – Handlowe KOMPAP’s performance with the industry and found that the company has shrunk its earnings at a slower rate than the industry earnings which has seen its earnings shrink by 6.3% in the same period. This does appease the negative sentiment around the company to a certain extent.

past-earnings-growth
WSE:KMP Past Earnings Growth July 15th 2021

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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Przedsiebiorstwo Produkcyjno – Handlowe KOMPAP is trading on a high P/E or a low P/E, relative to its industry.

Is Przedsiebiorstwo Produkcyjno – Handlowe KOMPAP Making Efficient Use Of Its Profits?

Despite having a normal three-year median payout ratio of 37% (where it is retaining 63% of its profits), Przedsiebiorstwo Produkcyjno – Handlowe KOMPAP has seen a decline in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, Przedsiebiorstwo Produkcyjno – Handlowe KOMPAP has been paying dividends over a period of five years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Conclusion

On the whole, we feel that the performance shown by Przedsiebiorstwo Produkcyjno – Handlowe KOMPAP can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. 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. You can see the 3 risks we have identified for Przedsiebiorstwo Produkcyjno – Handlowe KOMPAP 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. 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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