Are Novita S.A.'s (WSE:NVT) Mixed Financials Driving The Negative Sentiment?

It is hard to get excited after looking at Novita's (WSE:NVT) recent performance, when its stock has declined 11% over the past week. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on Novita's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Do You Calculate Return On Equity?

The formula for ROE is:

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

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

14% = zł19m ÷ zł138m (Based on the trailing twelve months to September 2025).

The 'return' refers to a company's earnings over the last year. So, this means that for every PLN1 of its shareholder's investments, the company generates a profit of PLN0.14.

View our latest analysis for Novita

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

A Side By Side comparison of Novita's Earnings Growth And 14% ROE

At first glance, Novita seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 14%. However, while Novita has a pretty respectable ROE, its five year net income decline rate was 20% . We reckon that there could be some other factors at play here that are preventing the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

So, as a next step, we compared Novita's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 27% over the last few years.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Novita's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Novita Efficiently Re-investing Its Profits?

Novita's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 98% (or a retention ratio of 1.8%). With only very little left to reinvest into the business, growth in earnings is far from likely. To know the 3 risks we have identified for Novita visit our risks dashboard for free.

Moreover, Novita has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

On the whole, we feel that the performance shown by Novita can be open to many interpretations. In spite of the high ROE, the company has failed to see growth in its earnings due to it paying out most of its profits as dividend, with almost nothing left to invest into its own business. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Novita's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.