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Is Novita’s Recent Share Price Rise Influenced By Fundamentals?


Novita (WSE:NVT) has had a great run on the share market with its stock up by a significant 16% over the last month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company’s key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Novita’s ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Novita

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

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

17% = zł23m ÷ zł140m (Based on the trailing twelve months to September 2022).

The ‘return’ refers to a company’s earnings over the last year. One way to conceptualize this is that for each PLN1 of shareholders’ capital it has, the company made PLN0.17 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Novita’s Earnings Growth And 17% ROE

To start with, Novita’s ROE looks acceptable. Be that as it may, the company’s ROE is still quite lower than the industry average of 23%. However, we are pleased to see the impressive 32% net income growth reported by Novita over the past five years. Therefore, there could be other causes behind this growth. Such as – high earnings retention or an efficient management in place. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this certainly also provides some context to the high earnings growth seen by the company.

We then compared Novita’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 19% in the same period.

WSE:NVT Past Earnings Growth January 21st 2023

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Novita is trading on a high P/E or a low P/E, relative to its industry.

Is Novita Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 56% (implying that it keeps only 44% of profits) for Novita suggests that the company’s growth wasn’t really hampered despite it returning most of the earnings to its shareholders.

Moreover, Novita is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

In total, it does look like Novita has some positive aspects to its business. Specifically, its respectable ROE which likely led to the considerable growth in earnings. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that’s not too bad. Until now, we have only just grazed the surface of the company’s past performance by looking at the company’s fundamentals. To gain further insights into Novita’s past profit growth, check out this visualization of past earnings, revenue and cash flows.

Valuation is complex, but we’re helping make it simple.

Find out whether Novita is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.



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