Elvalhalcor Hellenic Copper and Aluminium Industry S.A.'s (ATH:ELHA) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Most readers would already be aware that Elvalhalcor Hellenic Copper and Aluminium Industry's (ATH:ELHA) stock increased significantly by 16% over the past month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Elvalhalcor Hellenic Copper and Aluminium Industry's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Elvalhalcor Hellenic Copper and Aluminium Industry

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Elvalhalcor Hellenic Copper and Aluminium Industry is:

3.1% = €24m ÷ €772m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. 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?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Elvalhalcor Hellenic Copper and Aluminium Industry's Earnings Growth And 3.1% ROE

As you can see, Elvalhalcor Hellenic Copper and Aluminium Industry's ROE looks pretty weak. Even when compared to the industry average of 9.7%, the ROE figure is pretty disappointing. However, the moderate 16% net income growth seen by Elvalhalcor Hellenic Copper and Aluminium Industry over the past five years is definitely a positive. We believe that 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.

Next, on comparing with the industry net income growth, we found that Elvalhalcor Hellenic Copper and Aluminium Industry's reported growth was lower than the industry growth of 26% in the same period, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Elvalhalcor Hellenic Copper and Aluminium Industry is trading on a high P/E or a low P/E, relative to its industry.

Is Elvalhalcor Hellenic Copper and Aluminium Industry Efficiently Re-investing Its Profits?

Elvalhalcor Hellenic Copper and Aluminium Industry has a low three-year median payout ratio of 18%, meaning that the company retains the remaining 82% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

While Elvalhalcor Hellenic Copper and Aluminium Industry has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Summary

In total, it does look like Elvalhalcor Hellenic Copper and Aluminium Industry has some positive aspects to its business. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. 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. You can see the 2 risks we have identified for Elvalhalcor Hellenic Copper and Aluminium Industry by visiting our risks dashboard for free on our platform here.

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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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