4fun Media (WSE: 4FM) has had an excellent performance in the equity market with a significant 38% share increase in the past three months. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . In this article, we have decided to focus on the ROE of 4fun Media.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
See our latest review for 4fun Media
How is the ROE calculated?
The return on equity formula is:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for 4fun Media is:
14% = zÅ4.2m zÅ30m (Based on the last twelve months up to September 2021).
The “return” is the income the business has earned over the past year. One way to conceptualize this is that for every PLN1 of shareholder capital it has, the company made a profit of PLN 0.14.
What is the relationship between ROE and profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of those profits the company reinvests or âwithholdsâ and its efficiency, we are then able to assess a company’s profit growth potential. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate than companies that do not have the same characteristics.
4fun Media profit growth and 14% ROE
At first glance, 4fun Media seems to have a decent ROE. Even so, compared to the industry average ROE of 24%, we’re not very excited. Additional research shows that 4fun Media’s net income has declined by 35% over the past five years. Remember, the business has a high ROE to start with, just lower than the industry average. So there may be other reasons why profits decrease. For example, the company pays out a large portion of its profits as dividends or faces competitive pressures.
So, in the next step, we compared the performance of 4fun Media to that of the industry and were disappointed to find that as the company reduced its profits, the industry increased its profits at a rate of 14 % during the same period.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. Is 4fun Media fair compared to other companies? These 3 evaluation measures could help you decide.
Does 4fun Media effectively reinvest its profits?
Although the company has paid part of its dividend in the past, it currently does not pay any dividends. This implies that potentially all of its profits are reinvested in the business.
All in all, it seems that 4fun Media has positive aspects for its business. However, although the company has a decent ROE and high profit retention, its profit growth figure is quite disappointing. This suggests that there could be an external threat to the business, hampering growth. While we don’t completely reject the business, what we would do is try to determine how risky the business is in order to make a more informed decision about the business. You can see the 3 risks we have identified for 4fun Media by visiting our risk dashboard for free on our platform here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.