Does Automatyka-Pomiary-Sterowanie SA (WSE: APS) latest stock performance reflect financial health?

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Automatyka-Pomiary-Sterowanie (WSE: APS) share is up a significant 30% in the past three months. Given the company’s impressive performance, we decided to take a closer look at the financial indicators, as the long-term financial health of a company typically determines its market performance. In this article, we decided to focus on Automatyka-Pomiary-Sterowanie’s ROE.

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

See our latest analysis for Automatyka-Pomiary-Sterowanie

How is ROE calculated?

The return on equity formula is:

Return on equity = net profit (from continuing operations) ÷ equity

So, based on the above formula, the ROE for Automatyka-Pomiary-Sterowanie is:

16% = zł2.1m ÷ zł12m (based on the next twelve months to September 2020).

The ‘return’ is the annual profit. This means that for every PLN1 of its shareholders’ investments, the company generates a profit of PLN0.16.

What does ROE have to do with earnings growth?

So far we have learned that ROE measures how efficiently a company generates its profit. Depending on how much of these profits the company reinvests or “retains” and how effectively it does so, we can then assess a company’s earnings growth potential. In general, other things being equal, companies with a high return on equity and profit retention have a faster growth rate than companies that don’t share these traits.

Automatyka-Pomiary-Sterowanie earnings growth and 16% ROE

For starters, Automatyka-Pomiary-Sterowanie appears to have a respectable ROE. Furthermore, the company’s ROE compares quite favorably with the industry average of 12%. This certainly adds some context to Automatyka-Pomiary-Sterowanie’s exceptional net profit growth of 30% over the past five years. We think that other factors may also play a role here. For example, it is possible that the company’s management has made some good strategic decisions or the company has a low payout ratio.

Then, when compared to the industry’s net income growth, we found that Automatyka-Pomiary-Sterowanie’s growth is quite high compared to the industry’s average growth of 16% over the same period, which is great to to see.

WSE: APS Past Earnings Growth Feb 21, 2021

Earnings growth is a huge factor in the valuation of stocks. The investor should try to determine whether the expected growth or decline in earnings, whatever the case, is priced in. By doing this, they will have a sense of whether the stock is heading for clear blue waters or if swampy waters await. A 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 the earnings outlook. So you may want to check if Automatyka-Pomiary-Sterowanie is trading against a high P / E or a low P / E, in relation to its industry.

Is Automatyka-Pomiary-Sterowanie using its retained earnings effectively?

Since Automatyka-Pomiary-Sterowanie does not pay dividends to its shareholders, we conclude that the company has reinvested all of its profits to grow its business.

Overview

Overall, we feel that Automatyka-Pomiary-Sterowanie’s performance was pretty good. We specifically like that the company is reinvesting a large portion of its profits at high returns. This, of course, has resulted in the company seeing significant profit growth. If the company continues to grow its earnings in the same way, it can have a positive impact on the stock price, given the impact of earnings per share on long-term stock prices. Remember that the price of a stock also depends on the perceived risk. Hence, investors should be aware of the risks associated with it before investing in a company. Our risk dashboard would have the 2 risks we identified for Automatyka-Pomiary-Sterowanie.

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This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell stock and does not take into account your objectives or your financial situation. We strive to provide you with long-term focused analysis powered by fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality material. Simply Wall St has no exposure to said stocks.
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