Is Llorente & Cuenca, S.A.'s (BME:LLYC) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

By
Simply Wall St
Published
January 08, 2022
BME:LLYC
Source: Shutterstock

Most readers would already be aware that Llorente & Cuenca's (BME:LLYC) stock increased significantly by 15% over the past week. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Llorente & Cuenca's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Llorente & Cuenca

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 Llorente & Cuenca is:

23% = €4.4m ÷ €19m (Based on the trailing twelve months to June 2021).

The 'return' is the yearly profit. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.23.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Llorente & Cuenca's Earnings Growth And 23% ROE

Firstly, we acknowledge that Llorente & Cuenca has a significantly high ROE. Secondly, even when compared to the industry average of 13% the company's ROE is quite impressive. Probably as a result of this, Llorente & Cuenca was able to see a decent net income growth of 17% over the last five years.

When you consider the fact that the industry earnings have shrunk at a rate of 0.3% in the same period, the company's net income growth is pretty remarkable.

past-earnings-growth
BME:LLYC Past Earnings Growth January 8th 2022

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Llorente & Cuenca is trading on a high P/E or a low P/E, relative to its industry.

Is Llorente & Cuenca Making Efficient Use Of Its Profits?

Llorente & Cuenca doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the decent earnings growth number that we discussed above.

Conclusion

In total, we are pretty happy with Llorente & Cuenca's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.