Declining Stock and Solid Fundamentals: Is The Market Wrong About L.D.C. S.A. (EPA:LOUP)?

With its stock down 5.6% over the past month, it is easy to disregard L.D.C (EPA:LOUP). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study L.D.C's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for L.D.C

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 L.D.C is:

10% = €147m ÷ €1.4b (Based on the trailing twelve months to August 2020).

The 'return' is the profit over the last twelve months. That means that for every €1 worth of shareholders' equity, the company generated €0.10 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. 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 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.

A Side By Side comparison of L.D.C's Earnings Growth And 10% ROE

At first glance, L.D.C seems to have a decent ROE. Especially when compared to the industry average of 8.4% the company's ROE looks pretty impressive. This probably laid the ground for L.D.C's moderate 5.8% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that L.D.C's growth is quite high when compared to the industry average growth of 0.01% in the same period, which is great to see.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is LOUP fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is L.D.C Using Its Retained Earnings Effectively?

L.D.C's three-year median payout ratio to shareholders is 18% (implying that it retains 82% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Besides, L.D.C has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. 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 17%. As a result, L.D.C's ROE is not expected to change by much either, which we inferred from the analyst estimate of 10% for future ROE.

Conclusion

On the whole, we feel that L.D.C's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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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