Is The Market Rewarding Grenobloise d'Electronique et d'Automatismes Société Anonyme (EPA:GEA) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?

February 15, 2021
  •  Updated
November 26, 2022
ENXTPA:GEA
Source: Shutterstock

It is hard to get excited after looking at Grenobloise d'Electronique et d'Automatismes Société Anonyme's (EPA:GEA) recent performance, when its stock has declined 9.9% over the past three months. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. In this article, we decided to focus on Grenobloise d'Electronique et d'Automatismes Société Anonyme's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Grenobloise d'Electronique et d'Automatismes Société Anonyme

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 Grenobloise d'Electronique et d'Automatismes Société Anonyme is:

3.3% = €2.6m ÷ €79m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.03.

What Is The Relationship Between ROE And 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.

A Side By Side comparison of Grenobloise d'Electronique et d'Automatismes Société Anonyme's Earnings Growth And 3.3% ROE

At first glance, Grenobloise d'Electronique et d'Automatismes Société Anonyme's ROE doesn't look very promising. Next, when compared to the average industry ROE of 7.1%, the company's ROE leaves us feeling even less enthusiastic. Given the circumstances, the significant decline in net income by 16% seen by Grenobloise d'Electronique et d'Automatismes Société Anonyme over the last five years is not surprising. We reckon that there could also be other factors at play here. Such as - low earnings retention or poor allocation of capital.

So, as a next step, we compared Grenobloise d'Electronique et d'Automatismes Société Anonyme's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 12% in the same period.

past-earnings-growth
ENXTPA:GEA Past Earnings Growth February 16th 2021

Earnings growth is an important metric to consider when valuing a stock. 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 Grenobloise d'Electronique et d'Automatismes Société Anonyme's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Grenobloise d'Electronique et d'Automatismes Société Anonyme Efficiently Re-investing Its Profits?

In spite of a normal three-year median payout ratio of 49% (that is, a retention ratio of 51%), the fact that Grenobloise d'Electronique et d'Automatismes Société Anonyme's earnings have shrunk is quite puzzling. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Moreover, Grenobloise d'Electronique et d'Automatismes Société Anonyme 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.

Summary

Overall, we have mixed feelings about Grenobloise d'Electronique et d'Automatismes Société Anonyme. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 2 risks we have identified for Grenobloise d'Electronique et d'Automatismes Société Anonyme.

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