Declining Stock and Solid Fundamentals: Is The Market Wrong About Compagnie Générale des Établissements Michelin Société en commandite par actions (EPA:ML)?

Compagnie Générale des Établissements Michelin Société en commandite par actions (EPA:ML) has had a rough month with its share price down 1.9%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Compagnie Générale des Établissements Michelin Société en commandite par actions' ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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:

14% = €2.4b ÷ €17b (Based on the trailing twelve months to June 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 €0.14 in profit.

What Has ROE Got To Do With 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.

Compagnie Générale des Établissements Michelin Société en commandite par actions' Earnings Growth And 14% ROE

At first glance, Compagnie Générale des Établissements Michelin Société en commandite par actions seems to have a decent ROE. On comparing with the average industry ROE of 8.6% the company's ROE looks pretty remarkable. Probably as a result of this, Compagnie Générale des Établissements Michelin Société en commandite par actions was able to see a decent growth of 6.5% over the last five years.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Compagnie Générale des Établissements Michelin Société en commandite par actions compares quite favourably to the industry average, which shows a decline of 15% over the last few years.

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 ML? You can find out in our latest intrinsic value infographic research report.

Is Compagnie Générale des Établissements Michelin Société en commandite par actions Efficiently Re-investing Its Profits?

Compagnie Générale des Établissements Michelin Société en commandite par actions has a healthy combination of a moderate three-year median payout ratio of 44% (or a retention ratio of 56%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Moreover, Compagnie Générale des Établissements Michelin Société en commandite par actions is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. 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%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 12%.

Summary

Overall, we are quite pleased with Compagnie Générale des Établissements Michelin Société en commandite par actions' 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.