Grenobloise d'Electronique et d'Automatismes Société Anonyme (EPA:GEA) Stock's On A Decline: Are Poor Fundamentals The Cause?

Grenobloise d'Electronique et d'Automatismes Société Anonyme (EPA:GEA) has had a rough month with its share price down 15%. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Particularly, we will be paying attention to Grenobloise d'Electronique et d'Automatismes Société Anonyme's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Grenobloise d'Electronique et d'Automatismes Société Anonyme

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Grenobloise d'Electronique et d'Automatismes Société Anonyme is:

2.2% = €1.6m ÷ €73m (Based on the trailing twelve months to September 2023).

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 €0.02 in profit.

What Is The Relationship Between ROE And 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Grenobloise d'Electronique et d'Automatismes Société Anonyme's Earnings Growth And 2.2% ROE

It is quite clear that Grenobloise d'Electronique et d'Automatismes Société Anonyme's ROE is rather low. Even when compared to the industry average of 7.5%, the ROE figure is pretty disappointing. Therefore, it might not be wrong to say that the five year net income decline of 26% seen by Grenobloise d'Electronique et d'Automatismes Société Anonyme was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

However, when we compared Grenobloise d'Electronique et d'Automatismes Société Anonyme's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 16% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Grenobloise d'Electronique et d'Automatismes Société Anonyme's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Grenobloise d'Electronique et d'Automatismes Société Anonyme Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 64% (implying that 36% of the profits are retained), most of Grenobloise d'Electronique et d'Automatismes Société Anonyme's profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 2 risks we have identified for Grenobloise d'Electronique et d'Automatismes Société Anonyme by visiting our risks dashboard for free on our platform here.

In addition, Grenobloise d'Electronique et d'Automatismes Société Anonyme has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

Overall, we would be extremely cautious before making any decision on Grenobloise d'Electronique et d'Automatismes Société Anonyme. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Grenobloise d'Electronique et d'Automatismes Société Anonyme and see how it has performed in the past by looking at this FREE detailed graph 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.