Piscines Desjoyaux SA's (EPA:ALPDX) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

It is hard to get excited after looking at Piscines Desjoyaux's (EPA:ALPDX) recent performance, when its stock has declined 10% over the past week. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Piscines Desjoyaux's ROE.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Piscines Desjoyaux

How To 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 Piscines Desjoyaux is:

26% = €26m ÷ €98m (Based on the trailing twelve months to August 2021).

The 'return' is the yearly profit. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.26.

What Is The Relationship Between ROE And 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.

Piscines Desjoyaux's Earnings Growth And 26% ROE

Firstly, we acknowledge that Piscines Desjoyaux has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 22% which is quite remarkable. So, the substantial 35% net income growth seen by Piscines Desjoyaux over the past five years isn't overly surprising.

As a next step, we compared Piscines Desjoyaux's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 22%.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Piscines Desjoyaux is trading on a high P/E or a low P/E, relative to its industry.

Is Piscines Desjoyaux Making Efficient Use Of Its Profits?

The three-year median payout ratio for Piscines Desjoyaux is 41%, which is moderately low. The company is retaining the remaining 59%. By the looks of it, the dividend is well covered and Piscines Desjoyaux is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Piscines Desjoyaux has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we are quite pleased with Piscines Desjoyaux's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth.

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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.