Is Centrale d'Achat Française pour l'Outre-Mer Société Anonyme's(EPA:CAFO) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Centrale d'Achat Française pour l'Outre-Mer Société Anonyme's (EPA:CAFO) stock increased significantly by 100% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Centrale d'Achat Française pour l'Outre-Mer Société Anonyme's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Centrale d'Achat Française pour l'Outre-Mer Société Anonyme

How Is ROE Calculated?

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 Centrale d'Achat Française pour l'Outre-Mer Société Anonyme is:

13% = €13m ÷ €99m (Based on the trailing twelve months to September 2020).

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 €0.13 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. 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.

Centrale d'Achat Française pour l'Outre-Mer Société Anonyme's Earnings Growth And 13% ROE

To begin with, Centrale d'Achat Française pour l'Outre-Mer Société Anonyme seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 11%. Consequently, this likely laid the ground for the impressive net income growth of 40% seen over the past five years by Centrale d'Achat Française pour l'Outre-Mer Société Anonyme. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Centrale d'Achat Française pour l'Outre-Mer 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 31% in the same 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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Centrale d'Achat Française pour l'Outre-Mer Société Anonyme's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Centrale d'Achat Française pour l'Outre-Mer Société Anonyme Using Its Retained Earnings Effectively?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. This is likely what's driving the high earnings growth number discussed above.

Conclusion

Overall, we are quite pleased with Centrale d'Achat Française pour l'Outre-Mer Société Anonyme's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 2 risks we have identified for Centrale d'Achat Française pour l'Outre-Mer Société Anonyme visit our risks dashboard for free.

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This article by Simply Wall St is general in nature. 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.
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