Declining Stock and Solid Fundamentals: Is The Market Wrong About Société de Services, de Participations, de Direction et d'Elaboration (EBR:SPA)?

Société de Services de Participations de Direction et d'Elaboration (EBR:SPA) has had a rough month with its share price down 5.2%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Société de Services de Participations de Direction et d'Elaboration's ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Société de Services de Participations de Direction et d'Elaboration

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 Société de Services de Participations de Direction et d'Elaboration is:

11% = €23m ÷ €214m (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.11 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. 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.

Société de Services de Participations de Direction et d'Elaboration's Earnings Growth And 11% ROE

To begin with, Société de Services de Participations de Direction et d'Elaboration seems to have a respectable ROE. Especially when compared to the industry average of 8.0% the company's ROE looks pretty impressive. This certainly adds some context to Société de Services de Participations de Direction et d'Elaboration's decent 13% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Société de Services de Participations de Direction et d'Elaboration's growth is quite high when compared to the industry average growth of 5.6% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Société de Services de Participations de Direction et d'Elaboration fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Société de Services de Participations de Direction et d'Elaboration Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 28% (implying that the company retains 72% of its profits), it seems that Société de Services de Participations de Direction et d'Elaboration is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, Société de Services de Participations de Direction et d'Elaboration has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we feel that Société de Services de Participations de Direction et d'Elaboration's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard will have the 1 risk we have identified for Société de Services de Participations de Direction et d'Elaboration.

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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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