Polwax SA (WSE:PWX) shares are recovering but financials seem ambiguous: will the momentum continue?

By William S. Archambault Last updated Mar 4, 2022

Polwax Inc (WSE:PWX) has had a strong run in the stock market with a significant 11% rise in its stock over the past week. However, we decided to pay attention to the fundamentals of the company which do not seem to give a clear indication of the financial health of the company. Specifically, we decided to study the ROE of Polwax in this article.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In simple terms, it is used to assess the profitability of a company in relation to its equity.

See our latest analysis for Polwax

How to calculate return on equity?

the ROE formula East:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Polwax is:

6.3% = 5.6 million zł ÷ 89 million zł (based on the last twelve months until September 2021).

“Yield” is the income the business has earned over the past year. Another way to think about this is that for every 1 PLN worth of equity, the company was able to make a profit of 0.06 PLN.

Why is ROE important for earnings growth?

We have already established that ROE serves as an effective earnings-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

Polwax earnings growth and ROE of 6.3%

When you first look at it, Polwax’s ROE doesn’t look so appealing. Then, compared to the industry average ROE of 10%, the company’s ROE leaves us even less excited. For this reason, Polwax’s 44% drop in net income over five years is not surprising given its lower ROE. We believe there could be other factors at play here as well. For example, it is possible that the company has misallocated capital or that the company has a very high payout ratio.

However, when we compared Polwax’s growth with the industry, we found that although the company’s earnings declined, the industry saw earnings growth of 5.8% over the same period. period. It’s quite worrying.

WSE: PWX Past Earnings Growth March 4, 2022

Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. Is Polwax correctly valued compared to other companies? These 3 assessment metrics might help you decide.

Does Polwax effectively reinvest its profits?

Polwax does not pay any dividends, which means that potentially all of its profits are reinvested in the company, which does not explain why the company’s profits have decreased if it retains all of its profits. So there could be other explanations for this. For example, the company’s business may deteriorate.

Conclusion

Overall, we feel that the performance shown by Polwax can lend itself to many interpretations. Although the company has a high earnings retention rate, its low rate of return is likely hampering its earnings growth. In conclusion, we would proceed with caution with this business and one way to do that would be to review the risk profile of the business. To know the 3 risks that we have identified for Polwax, 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 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.