EnviTec Biogas AG's (ETR:ETG) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

EnviTec Biogas (ETR:ETG) has had a great run on the share market with its stock up by a significant 18% over the last three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on EnviTec Biogas' 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. 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 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 EnviTec Biogas is:

7.5% = €11m ÷ €144m (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.07 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. 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.

A Side By Side comparison of EnviTec Biogas' Earnings Growth And 7.5% ROE

When you first look at it, EnviTec Biogas' ROE doesn't look that attractive. However, its ROE is similar to the industry average of 8.0%, so we won't completely dismiss the company. Moreover, we are quite pleased to see that EnviTec Biogas' net income grew significantly at a rate of 39% over the last five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared EnviTec Biogas' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 17%.

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about EnviTec Biogas''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is EnviTec Biogas Using Its Retained Earnings Effectively?

EnviTec Biogas has very a high three-year median payout ratio of 230% suggesting that the company's shareholders are getting paid from more than just the company's earnings. In spite of this, the company was able to grow its earnings significantly, as we saw above. With that said, it could be worth keeping an eye on the high payout ratio as that's a huge risk. You can see the 2 risks we have identified for EnviTec Biogas by visiting our risks dashboard for free on our platform here.

Moreover, EnviTec Biogas is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend.

Conclusion

In total, we're a bit ambivalent about EnviTec Biogas' performance. While the company has posted impressive earnings growth, its poor ROE and low earnings retention makes us doubtful if that growth could continue, if by any chance the business is faced with any sort of risk. So far, we've only made a quick discussion around the company's earnings growth. 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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