Groupe Guillin's (EPA:ALGIL) stock is up by a considerable 5.0% over the past week. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Groupe Guillin's ROE today.
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. Put another way, it reveals the company's success at turning shareholder investments into profits.
See our latest analysis for Groupe Guillin
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Groupe Guillin is:
13% = €52m ÷ €406m (Based on the trailing twelve months to June 2020).
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 €0.13.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
A Side By Side comparison of Groupe Guillin's Earnings Growth And 13% ROE
To start with, Groupe Guillin's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 12%. Despite this, Groupe Guillin's five year net income growth was quite flat over the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. These include low earnings retention or poor allocation of capital.
As a next step, we compared Groupe Guillin's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 5.0% in the same period.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Groupe Guillin's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Groupe Guillin Making Efficient Use Of Its Profits?
Despite having a moderate three-year median payout ratio of 27% (meaning the company retains73% of profits) in the last three-year period, Groupe Guillin's earnings growth was more or les flat. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.
Moreover, Groupe Guillin 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. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 53% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 9.6%, over the same period.
Conclusion
On the whole, we do feel that Groupe Guillin has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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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