With its security down 13% in the past month, it’s easy to ignore Etex (EBR: 094124453). However, stock prices are generally determined by a company’s long-term financial performance, which in this case looks quite promising. In this article, we decided to focus on Etex’s ROE.
ROE or return on equity is a useful tool to assess the extent to which a company can generate a return on the investment it has received from its shareholders. In other words, it’s a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
Check out our latest analysis for Etex
How to calculate the return on equity?
the formula for ROE East:
Return on equity = net profit (from continuing operations) ÷ equity
Thus, based on the above formula, the ROE for Etex is:
16% = 181 million euros ÷ 1.2 billion euros (based on the last twelve months until December 2019).
“Yield” is the income the business has earned in the past year. Another way of thinking is that for every € 1 of equity, the company was able to generate € 0.16 in profit.
What does ROE have to do with earnings growth?
So far, we have learned that ROE measures the efficiency with which a company generates its profits. Depending on the share of these profits that the company reinvests or “keeps” and its efficiency, we can then assess the growth potential of a company’s profits. Assuming that everything else is equal, the firms that have both higher return on equity and profit retention are generally the ones that have a higher growth rate compared to firms that do not have the same characteristics.
Etex profit growth and 16% ROE
For starters, Etex’s ROE seems acceptable. Compared to the industry’s average ROE of 13%, the company’s ROE looks quite remarkable. This likely laid the foundation for moderate 18% growth in Etex’s net income over the past five years.
We then compared Etex’s net income growth with the industry and we are happy to see that the company’s growth figure is higher compared to the industry which has a growth rate of 8.0 % during the same period.
Profit growth is a huge factor in the valuation of stocks. What investors need to determine next is whether the expected profit growth, or lack thereof, is already built into the stock price. This then helps them determine if the stock is placed for a bright or dark future. A 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 outlook. So you may want to check whether Etex is trading on a high P / E or a low P / E, relative to its industry.
Is Etex using its retained earnings effectively?
Etex has a median payout rate over three years of 32%, which implies that it retains the remaining 68% of its profits. This suggests that his dividend is well covered and, given the decent growth observed by the company, it seems that management is effectively reinvesting its profits.
In addition, Etex paid dividends over a five-year period, which means the company is very serious about sharing its profits with shareholders.
All in all, we are quite satisfied with the performance of Etex. In particular, it is great to see that the company is investing heavily in its activities and with a high rate of return, which has resulted in significant growth in its revenues.
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Our goal is to provide you with long-term targeted research analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive corporate announcements or qualitative material. Thanks for the reading.
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