Corporación Acciona Energías Renovables, S.A.'s (BME:ANE) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Corporación Acciona Energías Renovables (BME:ANE) has had a rough three months with its share price down 28%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Corporación Acciona Energías Renovables' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Corporación Acciona Energías Renovables

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Corporación Acciona Energías Renovables is:

8.9% = €566m ÷ €6.3b (Based on the trailing twelve months to December 2023).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.09 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Corporación Acciona Energías Renovables' Earnings Growth And 8.9% ROE

At first glance, Corporación Acciona Energías Renovables' ROE doesn't look very promising. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 13% either. In spite of this, Corporación Acciona Energías Renovables was able to grow its net income considerably, at a rate of 31% in the last five years. So, there might be other aspects that are positively influencing the company's earnings 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 performed a comparison between Corporación Acciona Energías Renovables' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 31% in the same 5-year 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. If you're wondering about Corporación Acciona Energías Renovables''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Corporación Acciona Energías Renovables Using Its Retained Earnings Effectively?

Corporación Acciona Energías Renovables' three-year median payout ratio is a pretty moderate 28%, meaning the company retains 72% of its income. By the looks of it, the dividend is well covered and Corporación Acciona Energías Renovables is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

While Corporación Acciona Energías Renovables has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 39% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 5.6% over the same period.

Summary

Overall, we feel that Corporación Acciona Energías Renovables certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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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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.