Are Compagnie Plastic Omnium SE's (EPA:POM) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

With its stock down 35% over the past three months, it is easy to disregard Compagnie Plastic Omnium (EPA:POM). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Compagnie Plastic Omnium'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.

Check out our latest analysis for Compagnie Plastic Omnium

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 Compagnie Plastic Omnium is:

6.6% = €136m ÷ €2.0b (Based on the trailing twelve months to December 2021).

The 'return' is the yearly profit. That means that for every €1 worth of shareholders' equity, the company generated €0.07 in profit.

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.

Compagnie Plastic Omnium's Earnings Growth And 6.6% ROE

At first glance, Compagnie Plastic Omnium's ROE doesn't look very promising. Next, when compared to the average industry ROE of 9.0%, the company's ROE leaves us feeling even less enthusiastic. For this reason, Compagnie Plastic Omnium's five year net income decline of 30% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

With the industry earnings declining at a rate of 27% in the same period, we deduce that both the company and the industry are shrinking at the same rate.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Compagnie Plastic Omnium's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Compagnie Plastic Omnium Efficiently Re-investing Its Profits?

Compagnie Plastic Omnium's low three-year median payout ratio of 23% (or a retention ratio of 77%) over the last three years should mean that the company is retaining most of its earnings to fuel its growth but the company's earnings have actually shrunk. This typically shouldn't be the case when a company is retaining most of its earnings. So there could be some other explanations in that regard. For example, the company's business may be deteriorating.

In addition, Compagnie Plastic Omnium has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 25%. Regardless, the future ROE for Compagnie Plastic Omnium is predicted to rise to 16% despite there being not much change expected in its payout ratio.

Summary

In total, we're a bit ambivalent about Compagnie Plastic Omnium's performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. 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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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.