Do Fundamentals Have Any Role To Play In Driving Compagnie de Saint-Gobain S.A.'s (EPA:SGO) Stock Up Recently?

By
Simply Wall St
Published
January 09, 2022
ENXTPA:SGO
Source: Shutterstock

Compagnie de Saint-Gobain's (EPA:SGO) stock is up by 8.5% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Compagnie de Saint-Gobain's ROE today.

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.

Check out our latest analysis for Compagnie de Saint-Gobain

How Is ROE Calculated?

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 Compagnie de Saint-Gobain is:

12% = €2.3b ÷ €19b (Based on the trailing twelve months to June 2021).

The 'return' is the yearly profit. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.12 in profit.

What Has ROE Got To Do With 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 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.

A Side By Side comparison of Compagnie de Saint-Gobain's Earnings Growth And 12% ROE

To begin with, Compagnie de Saint-Gobain seems to have a respectable ROE. Especially when compared to the industry average of 8.9% the company's ROE looks pretty impressive. Needless to say, we are quite surprised to see that Compagnie de Saint-Gobain's net income shrunk at a rate of 6.5% over the past five years. Therefore, there might be some other aspects that could explain this. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

Next, on comparing with the industry net income growth, we found that Compagnie de Saint-Gobain's earnings seems to be shrinking at a similar rate as the industry which shrunk at a rate of a rate of 6.5% in the same period.

past-earnings-growth
ENXTPA:SGO Past Earnings Growth January 9th 2022

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is SGO worth today? The intrinsic value infographic in our free research report helps visualize whether SGO is currently mispriced by the market.

Is Compagnie de Saint-Gobain Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 59% (implying that 41% of the profits are retained), most of Compagnie de Saint-Gobain's profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent.

In addition, Compagnie de Saint-Gobain 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. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 41% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 14%, over the same period.

Summary

Overall, we feel that Compagnie de Saint-Gobain certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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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