Karelia Tobacco Company Inc.'s (ATH:KARE) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that Karelia Tobacco's (ATH:KARE) stock increased significantly by 5.9% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Karelia Tobacco's ROE today.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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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 Karelia Tobacco is:

13% = €107m ÷ €828m (Based on the trailing twelve months to September 2025).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.13 in profit.

See our latest analysis for Karelia Tobacco

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Karelia Tobacco's Earnings Growth And 13% ROE

To start with, Karelia Tobacco's ROE looks acceptable. Be that as it may, the company's ROE is still quite lower than the industry average of 24%. Although, we can see that Karelia Tobacco saw a modest net income growth of 10% over the past five years. So, there might be other aspects that are positively influencing earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio. 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 also does lend some color to the fairly high earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Karelia Tobacco compares quite favourably to the industry average, which shows a decline of 0.3% 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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Karelia Tobacco's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Karelia Tobacco Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 37% (implying that the company retains 63% of its profits), it seems that Karelia Tobacco is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, Karelia Tobacco has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

In total, we are pretty happy with Karelia Tobacco's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate.

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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.