Compagnie d'Entreprises CFE SA (EBR:CFEB) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Compagnie d'Entreprises CFE's (EBR:CFEB) stock is up by a considerable 47% over the past three months. 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. Specifically, we decided to study Compagnie d'Entreprises CFE's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Compagnie d'Entreprises CFE

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 Compagnie d'Entreprises CFE is:

5.5% = €97m ÷ €1.8b (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. That means that for every €1 worth of shareholders' equity, the company generated €0.06 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Compagnie d'Entreprises CFE's Earnings Growth And 5.5% ROE

When you first look at it, Compagnie d'Entreprises CFE's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 11% either. For this reason, Compagnie d'Entreprises CFE's five year net income decline of 5.6% is not surprising given its lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For example, it is possible that the business has allocated capital poorly or that the company has a very high payout ratio.

That being said, we compared Compagnie d'Entreprises CFE's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 7.2% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for CFEB? You can find out in our latest intrinsic value infographic research report.

Is Compagnie d'Entreprises CFE Efficiently Re-investing Its Profits?

While the company did payout a portion of its dividend in the past, it currently doesn't pay a dividend. This implies that potentially all of its profits are being reinvested in the business.

Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 34%. As a result, Compagnie d'Entreprises CFE's ROE is not expected to change by much either, which we inferred from the analyst estimate of 5.7% for future ROE.

Conclusion

In total, we're a bit ambivalent about Compagnie d'Entreprises CFE's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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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