Stock Analysis

Has Thessaloniki Water Supply & Sewerage Co S.A. (ATH:EYAPS) Stock's Recent Performance Got Anything to Do With Its Financial Health?

ATSE:EYAPS
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Thessaloniki Water Supply & Sewerage Co's (ATH:EYAPS) stock up by 1.9% over the past week. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Thessaloniki Water Supply & Sewerage Co's ROE.

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 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 Thessaloniki Water Supply & Sewerage Co

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 Thessaloniki Water Supply & Sewerage Co is:

7.2% = €13m ÷ €178m (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.07.

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.

Thessaloniki Water Supply & Sewerage Co's Earnings Growth And 7.2% ROE

On the face of it, Thessaloniki Water Supply & Sewerage Co's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 5.1% which we definitely can't overlook. Still, Thessaloniki Water Supply & Sewerage Co's net income growth of 2.8% over the past five years was mediocre at best. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Therefore, the low growth in earnings could also be the result of this.

We then compared Thessaloniki Water Supply & Sewerage Co's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 7.9% in the same period, which is a bit concerning.

past-earnings-growth
ATSE:EYAPS Past Earnings Growth March 15th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Thessaloniki Water Supply & Sewerage Co is trading on a high P/E or a low P/E, relative to its industry.

Is Thessaloniki Water Supply & Sewerage Co Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 49% (or a retention ratio of 51% over the past three years, Thessaloniki Water Supply & Sewerage Co has seen very little growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, Thessaloniki Water Supply & Sewerage Co has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

Overall, we feel that Thessaloniki Water Supply & Sewerage Co certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return and is reinvesting a huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. 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 Thessaloniki Water Supply & Sewerage Co.

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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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