ENGIE SA (EPA:ENGI) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

By
Simply Wall St
Published
November 22, 2021
ENXTPA:ENGI
Source: Shutterstock

ENGIE (EPA:ENGI) has had a great run on the share market with its stock up by a significant 7.2% over the last month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to ENGIE's ROE today.

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 ENGIE

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 ENGIE is:

3.1% = €1.2b ÷ €37b (Based on the trailing twelve months to June 2021).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.03 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

ENGIE's Earnings Growth And 3.1% ROE

At first glance, ENGIE's ROE doesn't look very promising. Next, when compared to the average industry ROE of 12%, the company's ROE leaves us feeling even less enthusiastic. Despite this, surprisingly, ENGIE saw an exceptional 25% net income growth over the past five years. So, there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared ENGIE'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 5.2%.

past-earnings-growth
ENXTPA:ENGI Past Earnings Growth November 23rd 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for ENGI? You can find out in our latest intrinsic value infographic research report.

Is ENGIE Using Its Retained Earnings Effectively?

The really high three-year median payout ratio of 115% for ENGIE suggests that the company is paying its shareholders more than what it is earning. However, this hasn't hampered its ability to grow as we saw earlier. Having said that, the high payout ratio is definitely risky and something to keep an eye on. To know the 3 risks we have identified for ENGIE visit our risks dashboard for free.

Moreover, ENGIE is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 68% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 8.9%, over the same period.

Summary

In total, we're a bit ambivalent about ENGIE's performance. While no doubt its earnings growth is pretty substantial, its ROE and earnings retention is quite poor. So while the company has managed to grow its earnings in spite of this, we are unconvinced if this growth could extend, especially during troubled times. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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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