CEZ, a. s. (SEP:CEZ) Has Fared Decently But Fundamentals Look Uncertain: What Lies Ahead For The Stock?

CEZ a. s' (SEP:CEZ) stock is up by 6.6% over the past three months. Given that the stock prices usually follow long-term business performance, we wonder if the company's mixed financials could have any adverse effect on its current price price movement Particularly, we will be paying attention to CEZ a. s' ROE today.

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.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for CEZ a. s is:

11% = Kč30b ÷ Kč267b (Based on the trailing twelve months to March 2025).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CZK1 worth of equity, the company was able to earn CZK0.11 in profit.

View our latest analysis for CEZ a. s

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 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.

CEZ a. s' Earnings Growth And 11% ROE

When you first look at it, CEZ a. s' ROE doesn't look that attractive. However, its ROE is similar to the industry average of 9.7%, so we won't completely dismiss the company. Particularly, the exceptional 23% net income growth seen by CEZ a. s over the past five years is pretty remarkable. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared CEZ a. 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 14% in the same 5-year period.

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. What is CEZ worth today? The intrinsic value infographic in our free research report helps visualize whether CEZ is currently mispriced by the market.

Is CEZ a. s Making Efficient Use Of Its Profits?

CEZ a. s' significant three-year median payout ratio of 95% (where it is retaining only 5.5% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Besides, CEZ a. s has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 78% of its profits over the next three years. Regardless, the future ROE for CEZ a. s is predicted to rise to 14% despite there being not much change expected in its payout ratio.

Summary

In total, we're a bit ambivalent about CEZ a. s' performance. While no doubt its earnings growth is pretty substantial, its ROE and earnings retention is quite poor. So while the company has managed to grow its earnings in spite of this, we are unconvinced if this growth could extend, especially during troubled times. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.