Does The Market Have A Low Tolerance For EnviTec Biogas AG's (ETR:ETG) Mixed Fundamentals?

With its stock down 14% over the past month, it is easy to disregard EnviTec Biogas (ETR:ETG). 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. Particularly, we will be paying attention to EnviTec Biogas' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for EnviTec Biogas

How Do You 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 EnviTec Biogas is:

7.5% = €11m ÷ €144m (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 €0.07 in profit.

What Has ROE Got To Do With 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

EnviTec Biogas' Earnings Growth And 7.5% ROE

On the face of it, EnviTec Biogas' ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 8.6%, we may spare it some thought. Particularly, the exceptional 39% net income growth seen by EnviTec Biogas over the past five years is pretty remarkable. 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 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 EnviTec Biogas' 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 12% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is EnviTec Biogas fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is EnviTec Biogas Efficiently Re-investing Its Profits?

EnviTec Biogas' very high three-year median payout ratio of 230% suggests that the company is paying more to its shareholders than what it is earning. However, this hasn't hampered its ability to grow as we saw earlier. Although, it could be worth keeping an eye on the high payout ratio as that's a huge risk. To know the 2 risks we have identified for EnviTec Biogas visit our risks dashboard for free.

Additionally, EnviTec Biogas has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, we're a bit ambivalent about EnviTec Biogas' 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. 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 EnviTec Biogas' 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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