Is Weakness In Puig Brands, S.A. (BME:PUIG) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

It is hard to get excited after looking at Puig Brands' (BME:PUIG) recent performance, when its stock has declined 6.4% over the past month. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Puig Brands' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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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 Puig Brands is:

15% = €543m ÷ €3.5b (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.15 in profit.

Check out our latest analysis for Puig Brands

Why Is ROE Important For 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.

Puig Brands' Earnings Growth And 15% ROE

To begin with, Puig Brands seems to have a respectable ROE. Especially when compared to the industry average of 13% the company's ROE looks pretty impressive. This certainly adds some context to Puig Brands' exceptional 24% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Puig Brands' 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 6.6%.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for PUIG? You can find out in our latest intrinsic value infographic research report.

Is Puig Brands Using Its Retained Earnings Effectively?

Puig Brands has a three-year median payout ratio of 38% (where it is retaining 62% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Puig Brands is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 40%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 16%.

Summary

In total, we are pretty happy with Puig Brands' 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 company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.