KuibyshevAzot (MCX: KAZT) had a difficult month with its share price down 6.9%. However, stock prices are usually determined by a company’s long-term financials, which in this case looks pretty respectable. More precisely, we decided to study the ROE of KuibyshevAzot in this article.
Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how effectively their capital is being reinvested. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
See our latest review for KuibyshevAzot
How to calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for KuibyshevAzot is:
22% = â½8.8b Ã· â½41b (Based on the last twelve months up to June 2021).
The âreturnâ is the amount earned after tax over the past twelve months. One way to conceptualize this is that for every RUB1 of shareholders’ capital it has, the company made a profit of RUB0.22.
What is the relationship between ROE and profit 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 “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
A side-by-side comparison of KuibyshevAzot’s 22% profit growth and ROE
For starters, the ROE of KuibyshevAzot seems acceptable. And comparing with the industry, we found that the industry average ROE is similar at 22%. As you might expect, the 5.5% drop in net profit reported by KuibyshevAzot is a bit of a surprise. We believe there might be other factors at play here that are preventing the growth of the business. For example, the company pays out a large portion of its profits as dividends or faces competitive pressures.
With industry profits declining at a rate of 5.5% over the same period, we infer that the business and industry are declining at the same rate.
Profit growth is a huge 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. This then helps them determine whether the stock is set for a bright or dark future. Is KuibyshevAzot valued enough compared to other companies? These 3 evaluation measures could help you decide.
Does KuibyshevAzot effectively reinvest its profits?
KuibyshevAzot’s low three-year median payout rate of 15% (or an 85% retention rate) over the past three years should mean the company keeps most of its profits to fuel growth, but profits of the company have actually declined. The low payout should mean that the business keeps most of its profits and, therefore, should experience some growth. It seems that there could be other reasons for the lack in this regard. For example, the business could be in decline.
Additionally, KuibyshevAzot has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends over earnings growth.
Overall, we think KuibyshevAzot has some positive attributes. Still, the weak earnings growth is a bit of a concern, especially since the company has a high rate of return and is reinvesting a huge chunk of its earnings. At first glance, there might be other factors, which do not necessarily control the business, that are preventing growth. While we don’t completely reject the business, what we would do is try to determine how risky the business is in order to make a more informed decision about the business. To know the 2 risks that we have identified for KuibyshevAzot, visit our risk dashboard for free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is 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 documents. Simply Wall St has no position in any of the stocks mentioned.