Could The Market Be Wrong About The Italian Sea Group S.p.A. (BIT:TISG) Given Its Attractive Financial Prospects?

With its stock down 24% over the past month, it is easy to disregard Italian Sea Group (BIT:TISG). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Italian Sea Group'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Italian Sea Group

How To Calculate Return On Equity?

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 Italian Sea Group is:

23% = €34m ÷ €145m (Based on the trailing twelve months to December 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.23 in profit.

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. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Italian Sea Group's Earnings Growth And 23% ROE

First thing first, we like that Italian Sea Group has an impressive ROE. Even when compared to the industry average of 23% the company's ROE is pretty decent. Therefore, it might not be wrong to say that the impressive five year 41% net income growth seen by Italian Sea Group was probably achieved as a result of the high ROE.

We then compared Italian Sea Group's 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 15% in the same 5-year period.

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). 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 Italian Sea Group is trading on a high P/E or a low P/E, relative to its industry.

Is Italian Sea Group Making Efficient Use Of Its Profits?

Italian Sea Group has a three-year median payout ratio of 49% (where it is retaining 51% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Italian Sea Group is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Italian Sea Group is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 50%. Accordingly, forecasts suggest that Italian Sea Group's future ROE will be 25% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with Italian Sea Group's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.