Declining Stock and Decent Financials: Is The Market Wrong About Rémy Cointreau SA (EPA:RCO)?

It is hard to get excited after looking at Rémy Cointreau's (EPA:RCO) recent performance, when its stock has declined 7.3% over the past three months. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Rémy Cointreau'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Rémy Cointreau

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Rémy Cointreau is:

6.0% = €88m ÷ €1.5b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.06 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Rémy Cointreau's Earnings Growth And 6.0% ROE

At first glance, Rémy Cointreau's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 2.8%, is definitely interesting. Yet, Rémy Cointreau has posted measly growth of 3.2% over the past five years. Remember, the company's ROE is quite low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the low earnings growth.

Given that the industry shrunk its earnings at a rate of 3.6% in the same period, the net income growth of the company is quite impressive.

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. Is Rémy Cointreau fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Rémy Cointreau Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 55% (that is, the company retains only 45% of its income) over the past three years for Rémy Cointreau suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Additionally, Rémy Cointreau has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 49% of its profits over the next three years. Still, forecasts suggest that Rémy Cointreau's future ROE will rise to 12% even though the the company's payout ratio is not expected to change by much.

Conclusion

On the whole, we do feel that Rémy Cointreau has some positive attributes. Specifically, its respectable ROE which likely led to the considerable growth in earnings. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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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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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