Do Its Financials Have Any Role To Play In Driving Flexopack Société Anonyme Commercial and Industrial Plastics Company's (ATH:FLEXO) Stock Up Recently?

Most readers would already be aware that Flexopack Société Anonyme Commercial and Industrial Plastics' (ATH:FLEXO) stock increased significantly by 26% 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 Flexopack Société Anonyme Commercial and Industrial Plastics' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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

How Is ROE Calculated?

The formula for ROE is:

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.

Why Is ROE Important For 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of 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 12%, so we won't completely dismiss the company. On the other hand, Flexopack Société Anonyme Commercial and Industrial Plastics reported a moderate 17% net income growth over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Flexopack Société Anonyme Commercial and Industrial Plastics' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 6.8% in the same period.

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 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?

In Flexopack Société Anonyme Commercial and Industrial Plastics' case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 8.9% (or a retention ratio of 91%), which suggests that the company is investing most of its profits to grow its business.

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

Summary

Overall, we feel that Flexopack Société Anonyme Commercial and Industrial Plastics certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings.

If you’re looking to trade Flexopack Société Anonyme Commercial and Industrial Plastics, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.