Is Eurobio Scientific Société anonyme's (EPA:ALERS) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

By
Simply Wall St
Published
October 09, 2021
ENXTPA:ALERS
Source: Shutterstock

Eurobio Scientific Société anonyme's (EPA:ALERS) stock is up by a considerable 11% over the past week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Eurobio Scientific Société anonyme's ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Eurobio Scientific Société anonyme

How Do You Calculate Return On Equity?

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 Eurobio Scientific Société anonyme is:

68% = €73m ÷ €108m (Based on the trailing twelve months to December 2020).

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 €0.68 in profit.

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

A Side By Side comparison of Eurobio Scientific Société anonyme's Earnings Growth And 68% ROE

Firstly, we acknowledge that Eurobio Scientific Société anonyme has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 16% also doesn't go unnoticed by us. As a result, Eurobio Scientific Société anonyme's exceptional 79% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing Eurobio Scientific Société anonyme's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 79% in the same period.

past-earnings-growth
ENXTPA:ALERS Past Earnings Growth October 9th 2021

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Eurobio Scientific Société anonyme is trading on a high P/E or a low P/E, relative to its industry.

Is Eurobio Scientific Société anonyme Making Efficient Use Of Its Profits?

Given that Eurobio Scientific Société anonyme doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

On the whole, we feel that Eurobio Scientific Société anonyme's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 1 risk we have identified for Eurobio Scientific Société anonyme by visiting our risks dashboard for free on our platform here.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.