Cementir Holding N.V. (BIT:CEM) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

By
Simply Wall St
Published
January 12, 2022
BIT:CEM
Source: Shutterstock

Cementir Holding (BIT:CEM) has had a rough three months with its share price down 6.8%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Cementir Holding'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Cementir Holding

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Cementir Holding is:

13% = €149m ÷ €1.2b (Based on the trailing twelve months to September 2021).

The 'return' is the profit over the last twelve months. 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?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Cementir Holding's Earnings Growth And 13% ROE

At first glance, Cementir Holding seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 10%. Despite the modest returns, Cementir Holding's five year net income growth was quite low, averaging at only 2.9%. So, there could be some other factors at play that could be impacting the company's growth. For instance, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

We then compared Cementir Holding's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 10.0% in the same period, which is a bit concerning.

past-earnings-growth
BIT:CEM Past Earnings Growth January 12th 2022

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). 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 Cementir Holding is trading on a high P/E or a low P/E, relative to its industry.

Is Cementir Holding Using Its Retained Earnings Effectively?

A low three-year median payout ratio of 20% (implying that the company retains the remaining 80% of its income) suggests that Cementir Holding is retaining most of its profits. However, the low earnings growth number doesn't reflect this as high growth usually follows high profit retention. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, Cementir Holding 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 18%. Accordingly, forecasts suggest that Cementir Holding's future ROE will be 11% which is again, similar to the current ROE.

Summary

On the whole, we do feel that Cementir Holding has some positive attributes. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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