Is Malteries Franco-Belges Société Anonyme's (EPA:MALT) Latest Stock Performance A Reflection Of Its Financial Health?

Malteries Franco-Belges Société Anonyme (EPA:MALT) has had a great run on the share market with its stock up by a significant 15% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Malteries Franco-Belges Société Anonyme'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Malteries Franco-Belges Société Anonyme

How To Calculate Return On Equity?

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 Malteries Franco-Belges Société Anonyme is:

8.4% = €19m ÷ €225m (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.08 in profit.

Why Is ROE Important For 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 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.

Malteries Franco-Belges Société Anonyme's Earnings Growth And 8.4% ROE

To begin with, Malteries Franco-Belges Société Anonyme seems to have a respectable ROE. Even when compared to the industry average of 7.9% the company's ROE looks quite decent. Malteries Franco-Belges Société Anonyme's decent returns aren't reflected in Malteries Franco-Belges Société Anonyme'smediocre five year net income growth average of 3.1%. So, there could be some other factors at play that could be impacting the company's growth. For instance, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

When you consider the fact that the industry earnings have shrunk at a rate of 1.2% in the same period, the company's net income growth is pretty remarkable.

Earnings growth is a huge factor in stock valuation. 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. Is Malteries Franco-Belges Société Anonyme fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Malteries Franco-Belges Société Anonyme Making Efficient Use Of Its Profits?

Malteries Franco-Belges Société Anonyme's low three-year median payout ratio of 14% (or a retention ratio of 86%) should mean that the company is retaining most of its earnings to fuel its growth. However, the low earnings growth number doesn't reflect this fact. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Moreover, Malteries Franco-Belges Société Anonyme 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.

Conclusion

Overall, we are quite pleased with Malteries Franco-Belges Société Anonyme'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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 1 risk we have identified for Malteries Franco-Belges Société Anonyme visit our risks dashboard for free.

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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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