D'Ieteren Group SA's (EBR:DIE) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

D'Ieteren Group (EBR:DIE) has had a rough three months with its share price down 5.3%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on D'Ieteren Group'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for D'Ieteren Group

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for D'Ieteren Group is:

11% = €391m ÷ €3.4b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. That means that for every €1 worth of shareholders' equity, the company generated €0.11 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

D'Ieteren Group's Earnings Growth And 11% ROE

At first glance, D'Ieteren Group seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 10%. This certainly adds some context to D'Ieteren Group's exceptional 40% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

We then compared D'Ieteren Group's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 18% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is D'Ieteren Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is D'Ieteren Group Using Its Retained Earnings Effectively?

The three-year median payout ratio for D'Ieteren Group is 45%, which is moderately low. The company is retaining the remaining 55%. By the looks of it, the dividend is well covered and D'Ieteren Group is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, D'Ieteren Group 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. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 27% over the next three years. The fact that the company's ROE is expected to rise to 142% over the same period is explained by the drop in the payout ratio.

Conclusion

In total, we are pretty happy with D'Ieteren Group's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.