Gérard Perrier Industrie S.A.'s (EPA:PERR) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 13% over the past month, it is easy to disregard Gérard Perrier Industrie (EPA:PERR). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Gérard Perrier Industrie's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Gérard Perrier Industrie

How Do You Calculate Return On Equity?

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 Gérard Perrier Industrie is:

18% = €15m ÷ €82m (Based on the trailing twelve months to June 2021).

The 'return' is the yearly profit. That means that for every €1 worth of shareholders' equity, the company generated €0.18 in profit.

What Has ROE Got To Do With 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.

Gérard Perrier Industrie's Earnings Growth And 18% ROE

To start with, Gérard Perrier Industrie's ROE looks acceptable. Even when compared to the industry average of 16% the company's ROE looks quite decent. Despite the moderate return on equity, Gérard Perrier Industrie has posted a net income growth of 4.1% over the past five years. We reckon that a low growth, when returns are moderate could be the result of certain circumstances like low earnings retention or poor allocation of capital.

Next, on comparing Gérard Perrier Industrie's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 4.5% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Gérard Perrier Industrie is trading on a high P/E or a low P/E, relative to its industry.

Is Gérard Perrier Industrie Making Efficient Use Of Its Profits?

Despite having a moderate three-year median payout ratio of 48% (implying that the company retains the remaining 52% of its income), Gérard Perrier Industrie's earnings growth was quite low. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Moreover, Gérard Perrier Industrie has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. 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 44%. Accordingly, forecasts suggest that Gérard Perrier Industrie's future ROE will be 19% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with Gérard Perrier Industrie's 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 a good amount of growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.