Has Métropole Télévision S.A.'s (EPA:MMT) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Most readers would already be aware that Métropole Télévision's (EPA:MMT) stock increased significantly by 10% over the past month. 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 Métropole Télévision's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Métropole Télévision

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 Métropole Télévision is:

17% = €216m ÷ €1.3b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.17 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. 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.

Métropole Télévision's Earnings Growth And 17% ROE

At first glance, Métropole Télévision seems to have a decent ROE. Especially when compared to the industry average of 13% the company's ROE looks pretty impressive. However, we are curious as to how the high returns still resulted in flat growth for Métropole Télévision in the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital.

We then compared Métropole Télévision's net income growth with the industry and found that the average industry growth rate was 16% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Métropole Télévision is trading on a high P/E or a low P/E, relative to its industry.

Is Métropole Télévision Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 72% (implying that the company keeps only 28% of its income) of its business to reinvest into its business), most of Métropole Télévision's profits are being paid to shareholders, which explains the absence of growth in earnings.

In addition, Métropole Télévision has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 96% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 13%, over the same period.

Conclusion

In total, it does look like Métropole Télévision has some positive aspects to its business. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. In addition, on studying the latest analyst forecasts, we found that the company's earnings are expected to continue to shrink. 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.