Is Socfinasia S.A.'s (BDL:SCFNS) Stock On A Downtrend As A Result Of Its Poor Financials?

Socfinasia (BDL:SCFNS) has had a rough month with its share price down 5.2%. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Specifically, we decided to study Socfinasia'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Socfinasia

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 Socfinasia is:

8.1% = €21m ÷ €253m (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. That means that for every €1 worth of shareholders' equity, the company generated €0.08 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. 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.

A Side By Side comparison of Socfinasia's Earnings Growth And 8.1% ROE

When you first look at it, Socfinasia's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 8.2%, so we won't completely dismiss the company. Still, Socfinasia has seen a flat net income growth over the past five years. Remember, the company's ROE is not particularly great to begin with. Hence, this provides some context to the flat earnings growth seen by the company.

As a next step, we compared Socfinasia'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 7.1% in the same 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. Is Socfinasia fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Socfinasia Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 88% (meaning, the company retains only 12% of profits) for Socfinasia suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Moreover, Socfinasia 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.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Socfinasia. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Up till now, we've only made a short study of the company's growth data. You can do your own research on Socfinasia and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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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