Vente-Unique.com (EPA:ALVU) has had a great run on the share market with its stock up by a significant 52% over the last 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 Vente-Unique.com’s ROE.
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 simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Vente-Unique.com is:
14% = €2.1m ÷ €15m (Based on the trailing twelve months to March 2020).
The ‘return’ is the yearly profit. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.14 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.
Vente-Unique.com’s Earnings Growth And 14% ROE
To begin with, Vente-Unique.com seems to have a respectable ROE. Further, the company’s ROE compares quite favorably to the industry average of 9.0%. As you might expect, the 6.7% net income decline reported by Vente-Unique.com is a bit of a surprise. Therefore, there might be some other aspects that could explain this. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
As a next step, we compared Vente-Unique.com’s performance with the industry and found thatVente-Unique.com’s performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 2.9% in the same period, which is a slower than the company.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. One 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 prospects. So, you may want to check if Vente-Unique.com is trading on a high P/E or a low P/E, relative to its industry.
Is Vente-Unique.com Making Efficient Use Of Its Profits?
Vente-Unique.com’s declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 62% (or a retention ratio of 38%). With only very little left to reinvest into the business, growth in earnings is far from likely. Our risks dashboard should have the 4 risks we have identified for Vente-Unique.com.
Only recently, Vente-Unique.com stated paying a dividend. This likely means that the management might have concluded that its shareholders have a strong preference for dividends.
Overall, we feel that Vente-Unique.com certainly does have some positive factors to consider. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
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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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