Do Its Financials Have Any Role To Play In Driving Elve S.A.'s (ATH:ELBE) Stock Up Recently?

By
Simply Wall St
Published
May 31, 2021
ATSE:ELBE
Source: Shutterstock

Elve's (ATH:ELBE) stock is up by a considerable 16% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Elve's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Elve

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Elve is:

9.9% = €1.9m ÷ €19m (Based on the trailing twelve months to December 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 €0.10 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Elve's Earnings Growth And 9.9% ROE

On the face of it, Elve's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 10%. Particularly, the exceptional 31% net income growth seen by Elve over the past five years is pretty remarkable. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Elve's reported growth was lower than the industry growth of 56% in the same period, which is not something we like to see.

past-earnings-growth
ATSE:ELBE Past Earnings Growth June 1st 2021

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 Elve's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Elve Efficiently Re-investing Its Profits?

Given that Elve 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

In total, it does look like Elve has some positive aspects to its business. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard will have the 1 risk we have identified for Elve.

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