Is Warehouses Estates Belgium SCA's (EBR:WEB) Recent Price Movement Underpinned By Its Weak Fundamentals?

By
Simply Wall St
Published
August 07, 2020
ENXTBR:WEB

With its stock down 2.7% over the past three months, it is easy to disregard Warehouses Estates Belgium (EBR:WEB). It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Warehouses Estates Belgium'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Warehouses Estates Belgium

How To Calculate Return On Equity?

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 Warehouses Estates Belgium is:

6.3% = €9.9m ÷ €157m (Based on the trailing twelve months to December 2019).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.06 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Warehouses Estates Belgium's Earnings Growth And 6.3% ROE

At first glance, Warehouses Estates Belgium's ROE doesn't look very promising. However, its ROE is similar to the industry average of 7.5%, so we won't completely dismiss the company. Having said that, Warehouses Estates Belgium has shown a modest net income growth of 6.8% over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Warehouses Estates Belgium's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 21% in the same period.

past-earnings-growth
ENXTBR:WEB Past Earnings Growth August 7th 2020

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Warehouses Estates Belgium's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Warehouses Estates Belgium Efficiently Re-investing Its Profits?

Warehouses Estates Belgium seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 83%, meaning the company retains only 17% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. In spite of this, the company was able to grow its earnings by a fair bit, as we saw above.

Additionally, Warehouses Estates Belgium has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

On the whole, we feel that the performance shown by Warehouses Estates Belgium can be open to many interpretations. While the company has posted a decent earnings growth, We do feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings at a higher 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 Warehouses Estates Belgium'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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