Do Fundamentals Have Any Role To Play In Driving Électricite de Strasbourg Société Anonyme's (EPA:ELEC) Stock Up Recently?

Électricite de Strasbourg Société Anonyme's (EPA:ELEC) stock up by 8.3% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Électricite de Strasbourg Société Anonyme's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Électricite de Strasbourg Société Anonyme

How Is ROE Calculated?

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 Électricite de Strasbourg Société Anonyme is:

14% = €53m ÷ €371m (Based on the trailing twelve months to December 2019).

The 'return' is the amount earned after tax over the last twelve months. That means that for every €1 worth of shareholders' equity, the company generated €0.14 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learnt 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. 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.

A Side By Side comparison of Électricite de Strasbourg Société Anonyme's Earnings Growth And 14% ROE

To start with, Électricite de Strasbourg Société Anonyme's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 8.4%. Needless to say, we are quite surprised to see that Électricite de Strasbourg Société Anonyme's net income shrunk at a rate of 2.1% over the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering 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.

However, when we compared Électricite de Strasbourg 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 8.3% in the same period. This is quite worrisome.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Électricite de Strasbourg Société Anonyme fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Électricite de Strasbourg Société Anonyme Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 66% (implying that 34% of the profits are retained), most of Électricite de Strasbourg Société Anonyme's profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent.

In addition, Électricite de Strasbourg 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.

Summary

On the whole, we do feel that Électricite de Strasbourg Société Anonyme has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Électricite de Strasbourg Société Anonyme's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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This article by Simply Wall St is general in nature. 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.
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