Are Strong Financial Prospects The Force That Is Driving The Momentum In SII (Société pour l'Informatique Industrielle) Société Anonyme's EPA:SII) Stock?

SII (Société pour l'Informatique Industrielle) Société Anonyme's (EPA:SII) stock is up by a considerable 33% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study SII (Société pour l'Informatique Industrielle) Société Anonyme'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for SII (Société pour l'Informatique Industrielle) 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 SII (Société pour l'Informatique Industrielle) Société Anonyme is:

16% = €27m ÷ €173m (Based on the trailing twelve months to March 2020).

The 'return' refers to a company's earnings over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.16 in profit.

What Is The Relationship Between ROE And 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of SII (Société pour l'Informatique Industrielle) Société Anonyme's Earnings Growth And 16% ROE

To begin with, SII (Société pour l'Informatique Industrielle) Société Anonyme seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 13%. Probably as a result of this, SII (Société pour l'Informatique Industrielle) Société Anonyme was able to see an impressive net income growth of 20% over the last five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared SII (Société pour l'Informatique Industrielle) Société Anonyme's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 11%.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about SII (Société pour l'Informatique Industrielle) Société Anonyme's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is SII (Société pour l'Informatique Industrielle) Société Anonyme Making Efficient Use Of Its Profits?

SII (Société pour l'Informatique Industrielle) Société Anonyme's ' three-year median payout ratio is on the lower side at 11% implying that it is retaining a higher percentage (89%) of its profits. So it looks like SII (Société pour l'Informatique Industrielle) Société Anonyme is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, SII (Société pour l'Informatique Industrielle) Société Anonyme has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 10%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 13%.

Conclusion

Overall, we are quite pleased with SII (Société pour l'Informatique Industrielle) 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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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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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