Can Mixed Fundamentals Have A Negative Impact on Catering International & Services Société Anonyme (EPA:CTRG) Current Share Price Momentum?

Most readers would already be aware that Catering International & Services Société Anonyme's (EPA:CTRG) stock increased significantly by 8.9% over the past month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study Catering International & Services Société Anonyme's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Catering International & Services Société Anonyme

How Do You Calculate Return On Equity?

Return on equity 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 Catering International & Services Société Anonyme is:

4.9% = €2.8m ÷ €57m (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.05 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. 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.

Catering International & Services Société Anonyme's Earnings Growth And 4.9% ROE

On the face of it, Catering International & Services Société Anonyme's ROE is not much to talk about. However, its ROE is similar to the industry average of 4.6%, so we won't completely dismiss the company. But Catering International & Services Société Anonyme saw a five year net income decline of 3.6% over the past five years. Remember, the company's ROE is a bit low to begin with. Therefore, the decline in earnings could also be the result of this.

However, when we compared Catering International & Services Société Anonyme's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 0.3% in the same period. This is quite worrisome.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Catering International & Services Société Anonyme's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Catering International & Services Société Anonyme Efficiently Re-investing Its Profits?

While the company did payout a portion of its dividend in the past, it currently doesn't pay a dividend. This implies that potentially all of its profits are being reinvested in the business.

Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 62% over the next three years. Still, forecasts suggest that Catering International & Services Société Anonyme's future ROE will rise to 8.9% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Conclusion

On the whole, we feel that the performance shown by Catering International & Services Société Anonyme can be open to many interpretations. 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. 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. 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. 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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