Practic S.A. (BVB:PRBU) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Practic's (BVB:PRBU) stock is up by a considerable 11% over the past week. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to Practic's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Practic

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 Practic is:

6.2% = RON27m ÷ RON437m (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. Another way to think of that is that for every RON1 worth of equity, the company was able to earn RON0.06 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Practic's Earnings Growth And 6.2% ROE

It is hard to argue that Practic's ROE is much good in and of itself. Still, the company's ROE is higher than the average industry ROE of 3.8% so that's certainly interesting. Especially considering that Practic has seen a decent 7.8% net income growth seen over the past five years. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. For instance, the company has a low payout ratio or is being managed efficiently

As a next step, we compared Practic's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 19% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Practic's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Practic Making Efficient Use Of Its Profits?

While Practic has a three-year median payout ratio of 97% (which means it retains 2.6% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Additionally, Practic 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

On the whole, we feel that the performance shown by Practic can be open to many interpretations. As noted earlier, its earnings growth has been quite decent, and the decent ROE does contribute to that growth. Still, the company invests little to almost none of its profits. This could potentially reduce the odds that the company continues to see the same level of growth in the future. Up till now, we've only made a short study of the company's growth data. You can do your own research on Practic 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.