Stock Analysis

Thessaloniki Water Supply & Sewerage Co S.A.'s (ATH:EYAPS) Stock Is Going Strong: Have Financials A Role To Play?

ATSE:EYAPS
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Most readers would already be aware that Thessaloniki Water Supply & Sewerage Co's (ATH:EYAPS) stock increased significantly by 9.8% 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 Thessaloniki Water Supply & Sewerage Co's ROE in this article.

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.

Check out our latest analysis for Thessaloniki Water Supply & Sewerage Co

How Is ROE Calculated?

The formula for return on equity is:

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 profit 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 Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 Thessaloniki Water Supply & Sewerage Co's Earnings Growth And 7.2% ROE

It is quite clear that Thessaloniki Water Supply & Sewerage Co's ROE is rather low. Still, the company's ROE is higher than the average industry ROE of 5.1% so that's certainly interesting. However, Thessaloniki Water Supply & Sewerage Co has seen a net income growth of only 2.8% over the past five years, which is not very much. Remember, the company's ROE is quite low to begin with, just that it is higher than the industry average. 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 7.5% in the same period, which is a bit concerning.

past-earnings-growth
ATSE:EYAPS Past Earnings Growth December 10th 2020

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. Is Thessaloniki Water Supply & Sewerage Co fairly valued compared to other companies? These 3 valuation measures might help you decide.

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

Despite having a moderate three-year median payout ratio of 49% (implying that the company retains the remaining 51% of its income), Thessaloniki Water Supply & Sewerage Co's earnings growth was quite low. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Thessaloniki Water Supply & Sewerage Co has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

Overall, we feel that Thessaloniki Water Supply & Sewerage Co certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. 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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