Ekotechnika AG's (ETR:ETE) Stock Is Going Strong: Is the Market Following Fundamentals?

Ekotechnika’s (ETR:ETE) stock is up by a considerable 88% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Ekotechnika’s ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

View our latest analysis for Ekotechnika

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

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

31% = €14m ÷ €44m (Based on the trailing twelve months to March 2022).

The ‘return’ refers to a company’s earnings over the last year. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.31 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.

Ekotechnika’s Earnings Growth And 31% ROE

First thing first, we like that Ekotechnika has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 14% also doesn’t go unnoticed by us. Probably as a result of this, Ekotechnika was able to see a decent net income growth of 15% over the last five years.

As a next step, we compared Ekotechnika’s net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 15% in the same period.

past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about Ekotechnika’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Ekotechnika Efficiently Re-investing Its Profits?

Ekotechnika has a low three-year median payout ratio of 0.7%, meaning that the company retains the remaining 99% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Along with seeing a growth in earnings, Ekotechnika only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

Overall, we are quite pleased with Ekotechnika’s performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let’s not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 1 risk we have identified for Ekotechnika visit our risks dashboard for free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here

Leave a Reply

Your email address will not be published. Required fields are marked *