Saint Jean Groupe Société anonyme (EPA:SABE) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Saint Jean Groupe Société anonyme (EPA:SABE) has had a great run on the share market with its stock up by a significant 24% over the last 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. Specifically, we decided to study Saint Jean Groupe Société anonyme'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 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 Saint Jean Groupe Société anonyme

How Do You 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 Saint Jean Groupe Société anonyme is:

0.8% = €597k ÷ €74m (Based on the trailing twelve months to December 2022).

The 'return' refers to a company's earnings over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.01 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.

Saint Jean Groupe Société anonyme's Earnings Growth And 0.8% ROE

As you can see, Saint Jean Groupe Société anonyme's ROE looks pretty weak. Even compared to the average industry ROE of 5.7%, the company's ROE is quite dismal. Given the circumstances, the significant decline in net income by 10% seen by Saint Jean Groupe Société anonyme over the last five years is not surprising. 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.

As a next step, we compared Saint Jean Groupe Société anonyme's performance with the industry and found thatSaint Jean Groupe Société anonyme's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 5.3% in the same period, which is a slower than the company.

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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Saint Jean Groupe Société anonyme is trading on a high P/E or a low P/E, relative to its industry.

Is Saint Jean Groupe Société anonyme Efficiently Re-investing Its Profits?

When we piece together Saint Jean Groupe Société anonyme's low three-year median payout ratio of 18% (where it is retaining 82% of its profits), calculated for the last three-year period, we are puzzled by the lack of growth. The low payout should mean that the company is retaining most of its earnings and consequently, should see some growth. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Moreover, Saint Jean Groupe 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 have mixed feelings about Saint Jean Groupe Société anonyme. 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. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 4 risks we have identified for Saint Jean Groupe Société anonyme by visiting our risks dashboard for free on our platform here.

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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.