Do Its Financials 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 (BIT:REC) has had a great run on the share market with its stock up by a significant 10% over the last month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Recordati Industria Chimica e Farmaceutica

How Do You Calculate Return On Equity?

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:

23% = €423m ÷ €1.9b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. That means that for every €1 worth of shareholders' equity, the company generated €0.23 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

A Side By Side comparison of Recordati Industria Chimica e Farmaceutica's Earnings Growth And 23% ROE

First thing first, we like that Recordati Industria Chimica e Farmaceutica has an impressive ROE. Secondly, even when compared to the industry average of 13% the company's ROE is quite impressive. Despite this, Recordati Industria Chimica e Farmaceutica's five year net income growth was quite flat over the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

We then compared Recordati Industria Chimica e Farmaceutica's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 13% in the same 5-year period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Has the market priced in the future outlook for REC? You can find out in our latest intrinsic value infographic research report.

Is Recordati Industria Chimica e Farmaceutica Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 64% (implying that the company keeps only 36% 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.

Moreover, Recordati Industria Chimica e Farmaceutica 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 51% of its profits over the next three years. Still, forecasts suggest that Recordati Industria Chimica e Farmaceutica's future ROE will rise to 30% even though the the company's payout ratio is not expected to change by much.

Conclusion

Overall, we feel that Recordati Industria Chimica e Farmaceutica certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.