Is Buzzi Unicem S.p.A.'s (BIT:BZU) Latest Stock Performance A Reflection Of Its Financial Health?

Buzzi Unicem (BIT:BZU) has had a great run on the share market with its stock up by a significant 14% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Buzzi Unicem's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Buzzi Unicem

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 Buzzi Unicem is:

13% = €468m ÷ €3.7b (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.13 in profit.

What Is The Relationship Between ROE And 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 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.

Buzzi Unicem's Earnings Growth And 13% ROE

To start with, Buzzi Unicem's ROE looks acceptable. Especially when compared to the industry average of 8.3% the company's ROE looks pretty impressive. This certainly adds some context to Buzzi Unicem's exceptional 23% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Buzzi Unicem's growth is quite high when compared to the industry average growth of 7.9% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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. 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 Buzzi Unicem is trading on a high P/E or a low P/E, relative to its industry.

Is Buzzi Unicem Using Its Retained Earnings Effectively?

Buzzi Unicem's three-year median payout ratio to shareholders is 6.6%, which is quite low. This implies that the company is retaining 93% of its profits. So it looks like Buzzi Unicem is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Buzzi Unicem has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 9.7% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 8.7%, over the same period.

Conclusion

Overall, we are quite pleased with Buzzi Unicem's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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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