Does Fintech SA’s (WSE:FTH) impressive stock performance have anything to do with its fundamentals?

Fintech’s (WSE:FTH) stock has risen a significant 91% in the past week. Given that share prices are usually aligned with a company’s long-term financial performance, we decided to study the financial indicators more closely to see if they had a hand in the recent price movement. In this article, we decided to focus on Fintech’s ROE.

ROE or return on equity is a useful tool for assessing how effectively a company can generate a return on the investment it received from its shareholders. In other words, it is a profitability ratio that measures the return on the capital contributed by the company’s shareholders.

Check out our latest analysis for Fintech

How to calculate return on equity?

The formula for ROE is:

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

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

2.5% = zł159k ÷ zł6.4m (Based on the last twelve months to September 2022).

The “return” is the annual profit. So this means that for every PLN1 of the shareholder’s investment, the company generates a profit of PLN0.02.

Why is ROE important for earnings growth?

So far we have learned that ROE measures how efficiently a company generates profits. Depending on how much of these profits the company reinvests or “retains”, and how efficiently it does so, we can then assess a company’s earnings growth potential. Assuming all else remains the same, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that do not necessarily have these characteristics.

Fintech’s revenue growth and 2.5% return

As you can see, Fintech’s ROE looks quite weak. Even compared to the industry average ROE of 13%, the company’s ROE is pretty dismal. However, we are pleasantly surprised to see that Fintech grew its net income at a significant rate of 55% in the last five years. We believe that there may be other aspects that positively affect the company’s earnings growth. It is possible, for example, that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.

Then, comparing to industry net revenue growth, we found that Fintech’s growth is quite high compared to the industry average growth of 14% over the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine whether the stock is positioned for a bright or bleak future. A good indicator of expected earnings growth is the P/E ratio, which determines the price the market is willing to pay for a share based on the earnings outlook. So it might be a good idea to check if Fintech is trading at a high P/E or a low P/E, relative to its industry.

Is Fintech using its earned income effectively?

Given that Fintech does not pay any dividends to its shareholders, we conclude that the company has reinvested all of its profits to grow the business.

Summary

On the whole, we feel that Fintech has some positive characteristics. Despite the low return, the fact that the company reinvests a very high proportion of the profits in the business has undoubtedly contributed to the high earnings growth. While we wouldn’t dismiss the company completely, what we would do is try to figure out how risky the business is in order to make a more informed decision around the company. To know the 4 risks we have identified for Fintech, visit our risk dashboard for free.

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This article by Simply Wall St is general. We provide commentary based on historical data and analyst forecasts only using an objective methodology, and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares, and does not take into account your goals or your financial situation. We aim to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.