Has EssilorLuxottica Société anonyme (EPA:EL) Stock's Recent Performance Got Anything to Do With Its Financial Health?

Most readers would already know that EssilorLuxottica Société anonyme's (EPA:EL) stock increased by 2.0% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to EssilorLuxottica Société anonyme'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for EssilorLuxottica Société anonyme

How Do You 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 EssilorLuxottica Société anonyme is:

6.2% = €2.4b ÷ €39b (Based on the trailing twelve months to December 2023).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.06 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.

EssilorLuxottica Société anonyme's Earnings Growth And 6.2% ROE

When you first look at it, EssilorLuxottica Société anonyme's ROE doesn't look that attractive. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 8.4%. In spite of this, EssilorLuxottica Société anonyme was able to grow its net income considerably, at a rate of 26% in the last five years. So, there might be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared EssilorLuxottica Société anonyme's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 5.4%.

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. If you're wondering about EssilorLuxottica Société anonyme's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is EssilorLuxottica Société anonyme Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 64% (implying that it keeps only 36% of profits) for EssilorLuxottica Société anonyme suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Additionally, EssilorLuxottica Société anonyme has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with 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 56%. However, EssilorLuxottica Société anonyme's ROE is predicted to rise to 9.6% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we feel that EssilorLuxottica Société anonyme certainly does have some positive factors to consider. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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. 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.