Is Laboratorio Reig Jofre, S.A.'s (BME:RJF) Stock On A Downtrend As A Result Of Its Poor Financials?

By
Simply Wall St
Published
January 25, 2022
BME:RJF
Source: Shutterstock

It is hard to get excited after looking at Laboratorio Reig Jofre's (BME:RJF) recent performance, when its stock has declined 25% over the past three months. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Particularly, we will be paying attention to Laboratorio Reig Jofre's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Laboratorio Reig Jofre

How To Calculate Return On Equity?

ROE 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 Laboratorio Reig Jofre is:

2.9% = €5.4m ÷ €189m (Based on the trailing twelve months to September 2021).

The 'return' is the profit over the last twelve months. That means that for every €1 worth of shareholders' equity, the company generated €0.03 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.

Laboratorio Reig Jofre's Earnings Growth And 2.9% ROE

It is quite clear that Laboratorio Reig Jofre's ROE is rather low. Even when compared to the industry average of 10%, the ROE figure is pretty disappointing. For this reason, Laboratorio Reig Jofre's five year net income decline of 4.4% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

However, when we compared Laboratorio Reig Jofre's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 12% in the same period. This is quite worrisome.

past-earnings-growth
BME:RJF Past Earnings Growth January 25th 2022

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Laboratorio Reig Jofre's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Laboratorio Reig Jofre Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 60% (implying that 40% of the profits are retained), most of Laboratorio Reig Jofre's profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. Our risks dashboard should have the 2 risks we have identified for Laboratorio Reig Jofre.

Additionally, Laboratorio Reig Jofre started paying a dividend only recently. So it looks like the management may have perceived that shareholders favor dividends even though earnings have been in decline. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 36% over the next three years. As a result, the expected drop in Laboratorio Reig Jofre's payout ratio explains the anticipated rise in the company's future ROE to 9.8%, over the same period.

Summary

On the whole, Laboratorio Reig Jofre's performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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