Is Joint Stock Company Kaspi.kz's (LON:KSPI) Recent Stock Performance Tethered To Its Strong Fundamentals?

Kaspi.kz (LON:KSPI) has had a great run on the share market with its stock up by a significant 26% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Kaspi.kz's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Kaspi.kz

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 Kaspi.kz is:

70% = ₸496b ÷ ₸708b (Based on the trailing twelve months to June 2022).

The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.70 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming all 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 when compared to companies that don't have the same features.

A Side By Side comparison of Kaspi.kz's Earnings Growth And 70% ROE

To begin with, Kaspi.kz has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 8.0% also doesn't go unnoticed by us. As a result, Kaspi.kz's exceptional 42% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Kaspi.kz's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 25%.

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. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for KSPI? You can find out in our latest intrinsic value infographic research report.

Is Kaspi.kz Using Its Retained Earnings Effectively?

Kaspi.kz's significant three-year median payout ratio of 63% (where it is retaining only 37% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Along with seeing a growth in earnings, Kaspi.kz only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 70% of its profits over the next three years. As a result, Kaspi.kz's ROE is not expected to change by much either, which we inferred from the analyst estimate of 78% for future ROE.

Summary

Overall, we are quite pleased with Kaspi.kz's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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.

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