Bearish Action and Strong Fundamentals: Is the Market Wrong on Sunex SA (WSE:SNX)?

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It’s hard to get excited after watching the recent performance of Sunex (WSE:SNX), as its stock is down 23% in the past month. But if you pay close attention, you might realize that its strong financials could mean the stock could potentially see a long-term rise in value, as the markets generally reward companies in good financial shape. Specifically, we decided to study Sunex’s ROE in this article.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simpler terms, it measures a company’s profitability relative to equity.

Check out our latest analysis for Sunex

How to calculate return on equity?

ROE can be calculated using the formula:

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

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

32% = 17 million zł ÷ 55 million zł (based on the last twelve months until June 2022).

The “return” is the annual profit. This means that for every 1 PLN value of equity, the company has generated 0.32 PLN of profit.

What is the relationship between ROE and earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Based on the share 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 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.

Sunex earnings growth and ROE of 32%

First, we recognize that Sunex has a significantly high ROE. Additionally, the company’s ROE is above the industry average of 13%, which is quite remarkable. As a result, Sunex’s exceptional 49% net income growth over the past five years comes as no surprise.

As a next step, we compared Sunex’s net income growth with the industry, and fortunately, we found that the growth seen by the company is higher than the industry average growth of 18%.

WSE: SNX Past Earnings Growth October 20, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. Is Sunex correctly valued compared to other companies? These 3 assessment metrics might help you decide.

Does Sunex use its profits effectively?

Sunex’s three-year median payout ratio is below 13%, meaning it keeps a higher percentage (87%) of its earnings. So it looks like Sunex is massively reinvesting its earnings to grow its business, which is reflected in its earnings growth.

Additionally, Sunex has paid dividends over a three-year period, which means the company is pretty serious about sharing its profits with its shareholders.

Summary

Overall, we believe Sunex’s performance has been quite good. In particular, it is good to see that the company is investing heavily in its business and, along with a high rate of return, this has resulted in significant growth in its profits. If the company continues to increase earnings as it has, it could have a positive impact on its share price given how earnings per share influence prices over the long term. Let’s not forget that business risk is also one of the factors that affect the stock price. This is therefore also an important area for investors to pay attention to before making a decision on a company. You can see the 4 risks we have identified for Sunex by visiting our risk dashboard for free on our platform here.

Valuation is complex, but we help make it simple.

Find out if Sunex is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

See the free analysis

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.

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