Vilmorin & Cie SA's (EPA:RIN) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Vilmorin & Cie's (EPA:RIN) stock is up by a considerable 14% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to Vilmorin & Cie's ROE today.

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.

See our latest analysis for Vilmorin & Cie

How To Calculate Return On Equity?

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 Vilmorin & Cie is:

5.5% = €68m ÷ €1.2b (Based on the trailing twelve months to June 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 €0.05 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. 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.

Vilmorin & Cie's Earnings Growth And 5.5% ROE

On the face of it, Vilmorin & Cie's ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 7.9% either. For this reason, Vilmorin & Cie's five year net income decline of 2.2% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate 1.2% in the same period, we found that Vilmorin & Cie's performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for RIN? You can find out in our latest intrinsic value infographic research report.

Is Vilmorin & Cie Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 39% (where it is retaining 61% of its profits), Vilmorin & Cie has seen a decline in earnings as we saw above. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Vilmorin & Cie 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 33%. Regardless, the future ROE for Vilmorin & Cie is predicted to rise to 7.5% despite there being not much change expected in its payout ratio.

Summary

On the whole, we feel that the performance shown by Vilmorin & Cie 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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