It is hard to get excited after looking at Etn. Fr. Colruyt's (EBR:COLR) recent performance, when its stock has declined 3.8% over the past month. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Etn. Fr. Colruyt'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
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 Etn. Fr. Colruyt is:
18% = €432m ÷ €2.4b (Based on the trailing twelve months to March 2020).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.18.
What Is The Relationship Between ROE And 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. 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.
Etn. Fr. Colruyt's Earnings Growth And 18% ROE
To begin with, Etn. Fr. Colruyt seems to have a respectable ROE. Especially when compared to the industry average of 11% the company's ROE looks pretty impressive. Despite this, Etn. Fr. Colruyt's five year net income growth was quite low averaging at only 3.4%. That's a bit unexpected from a company which has such a high rate of return. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.
We then compared Etn. Fr. Colruyt's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 6.1% in the same period, which is a bit concerning.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 COLR? You can find out in our latest intrinsic value infographic research report.
Is Etn. Fr. Colruyt Using Its Retained Earnings Effectively?
While Etn. Fr. Colruyt has a decent three-year median payout ratio of 46% (or a retention ratio of 54%), it has seen very little growth in earnings. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Moreover, Etn. Fr. Colruyt has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 46%. Regardless, Etn. Fr. Colruyt's ROE is speculated to decline to 13% despite there being no anticipated change in its payout ratio.
On the whole, we do feel that Etn. Fr. Colruyt has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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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