Is EssilorLuxottica Société anonyme's (EPA:EL) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

EssilorLuxottica Société anonyme (EPA:EL) has had a great run on the share market with its stock up by a significant 11% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for EssilorLuxottica Société anonyme

How Is ROE Calculated?

Return on equity 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 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. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.06.

What Has ROE Got To Do With 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.

A Side By Side comparison of EssilorLuxottica Société anonyme's Earnings Growth And 6.2% ROE

On the face of it, EssilorLuxottica Société anonyme's ROE is not much to talk about. 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 8.0%. However, we we're pleasantly surprised to see that EssilorLuxottica Société anonyme grew its net income at a significant rate of 26% in the last five years. We reckon that there could be other factors at play here. 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.

We then compared EssilorLuxottica Société anonyme's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 7.7% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is EL worth today? The intrinsic value infographic in our free research report helps visualize whether EL is currently mispriced by the market.

Is EssilorLuxottica Société anonyme Efficiently Re-investing Its Profits?

EssilorLuxottica Société anonyme has a significant three-year median payout ratio of 65%, meaning the company only retains 35% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to 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 55%. However, EssilorLuxottica Société anonyme's ROE is predicted to rise to 9.5% despite there being no anticipated change in its payout ratio.

Summary

On the whole, we do feel that EssilorLuxottica Société anonyme has some positive attributes. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.