Does Elve S.A.'s (ATH:ELBE) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Elve's (ATH:ELBE) stock is up by a considerable 20% over the past three months. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Elve

How Do You Calculate Return On Equity?

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 Elve is:

3.2% = €620k ÷ €19m (Based on the trailing twelve months to June 2024).

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 €0.03 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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 3.2% ROE

It is hard to argue that Elve's ROE is much good in and of itself. Not just that, even compared to the industry average of 9.1%, the company's ROE is entirely unremarkable. Therefore, Elve's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Elve's net income growth with the industry and discovered that the industry saw an average growth of 16% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. 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 Using Its Retained Earnings Effectively?

Elve has a three-year median payout ratio as high as 109% meaning that the company is paying a dividend which is beyond its means. The absence in growth is therefore not surprising. Paying a dividend higher than reported profits is not a sustainable move. That's a huge risk in our books. Our risks dashboard should have the 6 risks we have identified for Elve.

In addition, Elve has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

On the whole, Elve's performance is quite a big let-down. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Elve's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.