AXA SA's (EPA:CS) Stock's Been Going Strong: Could Weak Financials Mean The Market Will Correct Its Share Price?

By
Simply Wall St
Published
August 13, 2021
ENXTPA:CS
Source: Shutterstock

AXA (EPA:CS) has had a great run on the share market with its stock up by a significant 12% over the last month. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study AXA's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for AXA

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 AXA is:

7.4% = €5.9b ÷ €80b (Based on the trailing twelve months to June 2021).

The 'return' is the yearly profit. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.07 in profit.

Why Is ROE Important For 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

AXA's Earnings Growth And 7.4% ROE

On the face of it, AXA's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.1%. Having said that, AXA's five year net income decline rate was 13%. Remember, the company's ROE is a bit low to begin with. Therefore, the decline in earnings could also be the result of this.

Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate 4.4% in the same period, we found that AXA's performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.

past-earnings-growth
ENXTPA:CS Past Earnings Growth August 14th 2021

Earnings growth is an important metric to consider when valuing a stock. 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. Is CS fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is AXA Efficiently Re-investing Its Profits?

AXA's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 80% (or a retention ratio of 20%). With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. To know the 2 risks we have identified for AXA visit our risks dashboard for free.

Moreover, AXA 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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 56% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 9.7%, over the same period.

Summary

In total, we would have a hard think before deciding on any investment action concerning AXA. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. 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 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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