Do Fundamentals Have Any Role To Play In Driving Recordati Industria Chimica e Farmaceutica S.p.A.'s (BIT:REC) Stock Up Recently?

Recordati Industria Chimica e Farmaceutica's (BIT:REC) stock is up by 3.3% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Specifically, we decided to study Recordati Industria Chimica e Farmaceutica's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Recordati Industria Chimica e Farmaceutica

How Is ROE Calculated?

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 Recordati Industria Chimica e Farmaceutica is:

21% = €387m ÷ €1.8b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.21 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Recordati Industria Chimica e Farmaceutica's Earnings Growth And 21% ROE

To start with, Recordati Industria Chimica e Farmaceutica's ROE looks acceptable. Especially when compared to the industry average of 14% the company's ROE looks pretty impressive. However, we are curious as to how the high returns still resulted in flat growth for Recordati Industria Chimica e Farmaceutica in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared Recordati Industria Chimica e Farmaceutica's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 11% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Recordati Industria Chimica e Farmaceutica's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Recordati Industria Chimica e Farmaceutica Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 63% (implying that the company keeps only 37% of its income) of its business to reinvest into its business), most of Recordati Industria Chimica e Farmaceutica's profits are being paid to shareholders, which explains the absence of growth in earnings.

Additionally, Recordati Industria Chimica e Farmaceutica 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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 47% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.

Conclusion

Overall, we feel that Recordati Industria Chimica e Farmaceutica certainly does have some positive factors to consider. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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. 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.