Is Bouygues SA's (EPA:EN) Recent Stock Performance Influenced By Its Financials In Any Way?

By
Simply Wall St
Published
March 02, 2021
ENXTPA:EN

Most readers would already know that Bouygues' (EPA:EN) stock increased by 5.0% over the past month. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Bouygues' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Bouygues

How Do You 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 Bouygues is:

6.5% = €770m ÷ €12b (Based on the trailing twelve months to December 2020).

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?

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

Bouygues' Earnings Growth And 6.5% ROE

When you first look at it, Bouygues' ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 4.4% which we definitely can't overlook. Consequently, this likely laid the ground for the decent growth of 11% seen over the past five years by Bouygues. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

Given that the industry shrunk its earnings at a rate of 1.4% in the same period, the net income growth of the company is quite impressive.

past-earnings-growth
ENXTPA:EN Past Earnings Growth March 2nd 2021

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for EN? You can find out in our latest intrinsic value infographic research report.

Is Bouygues Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 54% (or a retention ratio of 46%) for Bouygues suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Bouygues 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 47%. Regardless, the future ROE for Bouygues is predicted to rise to 13% despite there being not much change expected in its payout ratio.

Summary

Overall, we feel that Bouygues certainly does have some positive factors to consider. Namely, its significant earnings growth, to which its moderate rate of return likely contributed. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. 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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