Is the latest market performance of European Eltech Public Joint Stock Company (MCX: EELT) driven by its strong fundamentals?
Eltech’s European stock (MCX: EELT) rose 4.4% over the past month. Given its impressive performance, we decided to study the key financial indicators of the business, as the long-term fundamentals of a business usually dictate market results. In particular, we will pay special attention to Eltech’s European ROE today.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by shareholders to the company.
See our latest analysis for European Eltech
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE for European Eltech is:
27% = ₽286m ÷ ₽1.0b (Based on the last twelve months up to September 2020).
The “return” is the income the business has earned over the past year. This therefore means that for each RUB1 of the investments of its shareholder, the company generates a profit of RUB0.27.
What does ROE have to do with profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with a high return on equity and profit retention have a higher growth rate than companies that do not share these attributes.
27% profit growth and ROE of Eltech in Europe
For starters, European Eltech seems to have a respectable ROE. When compared to the industry average ROE of 11%, the company’s ROE looks quite remarkable. Probably because of this, European Eltech has been able to see an impressive 27% net profit growth over the past five years. However, there could also be other causes behind this 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 rate.
We then compared the net income growth of European Eltech with the industry and we are happy to see that the growth figure of the company is higher than that of the industry which has a growth rate of 6, 7% over the same period.
Profit growth is an important factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. If you are wondering about the valuation of European Eltech, check out this indicator of its price / earnings ratio, relative to its industry.
Is European Eltech effectively reinvesting its profits?
All in all, we are quite satisfied with the performance of European Eltech. In particular, we like the fact that the company is reinvesting heavily in its activities and at a high rate of return. Unsurprisingly, this led to impressive profit growth. If the company continues to grow its earnings as it has, it could have a positive impact on its stock price given the influence of earnings per share on stock prices over the long term. Remember that the price of a stock also depends on the perceived risk. Therefore, investors should keep themselves informed of the risks involved before investing in a business. To know the risk 1 that we have identified for European Eltechs, visit our risk dashboard for free.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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