Declining Stock and Decent Financials: Is The Market Wrong About Flexopack Société Anonyme Commercial and Industrial Plastics Company (ATH:FLEXO)?

Flexopack Société Anonyme Commercial and Industrial Plastics (ATH:FLEXO) has had a rough month with its share price down 5.0%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Flexopack Société Anonyme Commercial and Industrial Plastics' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Flexopack Société Anonyme Commercial and Industrial Plastics

How Do You Calculate Return On Equity?

Return on equity 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 Flexopack Société Anonyme Commercial and Industrial Plastics is:

12% = €9.4m ÷ €79m (Based on the trailing twelve months to June 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 €0.12 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.

Flexopack Société Anonyme Commercial and Industrial Plastics' Earnings Growth And 12% ROE

When you first look at it, Flexopack Société Anonyme Commercial and Industrial Plastics' ROE doesn't look that attractive. However, its ROE is similar to the industry average of 13%, so we won't completely dismiss the company. Having said that, Flexopack Société Anonyme Commercial and Industrial Plastics has shown a modest net income growth of 17% over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's 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.

As a next step, we compared Flexopack Société Anonyme Commercial and Industrial Plastics' 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 7.2%.

Earnings growth is an important metric to consider when valuing a stock. 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 Flexopack Société Anonyme Commercial and Industrial Plastics''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Flexopack Société Anonyme Commercial and Industrial Plastics Making Efficient Use Of Its Profits?

Flexopack Société Anonyme Commercial and Industrial Plastics has a low three-year median payout ratio of 8.9%, meaning that the company retains the remaining 91% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Additionally, Flexopack Société Anonyme Commercial and Industrial Plastics has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

In total, it does look like Flexopack Société Anonyme Commercial and Industrial Plastics has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings.

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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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