Compagnie Générale des Établissements Michelin Société en commandite par actions' (EPA:ML) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 4.9% over the past month, it is easy to disregard Compagnie Générale des Établissements Michelin Société en commandite par actions (EPA:ML). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Compagnie Générale des Établissements Michelin Société en commandite par actions' 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Compagnie Générale des Établissements Michelin Société en commandite par actions

How Is ROE Calculated?

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 Compagnie Générale des Établissements Michelin Société en commandite par actions is:

11% = €2.0b ÷ €18b (Based on the trailing twelve months to December 2023).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.11.

What Is The Relationship Between ROE And Earnings Growth?

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

Compagnie Générale des Établissements Michelin Société en commandite par actions' Earnings Growth And 11% ROE

To start with, Compagnie Générale des Établissements Michelin Société en commandite par actions' ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 6.9%. This probably laid the ground for Compagnie Générale des Établissements Michelin Société en commandite par actions' moderate 10% net income growth seen over the past five years.

When you consider the fact that the industry earnings have shrunk at a rate of 13% in the same 5-year period, the company's net income growth is pretty remarkable.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is ML worth today? The intrinsic value infographic in our free research report helps visualize whether ML is currently mispriced by the market.

Is Compagnie Générale des Établissements Michelin Société en commandite par actions Making Efficient Use Of Its Profits?

Compagnie Générale des Établissements Michelin Société en commandite par actions has a three-year median payout ratio of 44%, which implies that it retains the remaining 56% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Additionally, Compagnie Générale des Établissements Michelin Société en commandite par actions has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. 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 46%. Still, forecasts suggest that Compagnie Générale des Établissements Michelin Société en commandite par actions' future ROE will rise to 14% even though the the company's payout ratio is not expected to change by much.

Summary

In total, we are pretty happy with Compagnie Générale des Établissements Michelin Société en commandite par actions' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.

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