Toyota Caetano Portugal, S.A.'s (ELI:SCT) Stock Is Going Strong: Have Financials A Role To Play?

Toyota Caetano Portugal (ELI:SCT) has had a great run on the share market with its stock up by a significant 10.0% over the last week. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Toyota Caetano Portugal's ROE.

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 Toyota Caetano Portugal

How To 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 Toyota Caetano Portugal is:

9.9% = €16m ÷ €162m (Based on the trailing twelve months to June 2023).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.10 in profit.

What Is The Relationship Between ROE And 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. 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.

Toyota Caetano Portugal's Earnings Growth And 9.9% ROE

At first glance, Toyota Caetano Portugal seems to have a decent ROE. Even so, when compared with the average industry ROE of 17%, we aren't very excited. Toyota Caetano Portugal was still able to see a decent net income growth of 7.2% over the past five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this also provides some context to the earnings growth seen by the company.

We then compared Toyota Caetano Portugal's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 17% in the same 5-year period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Toyota Caetano Portugal's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Toyota Caetano Portugal Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 60% (or a retention ratio of 40%) for Toyota Caetano Portugal suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Toyota Caetano Portugal is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend.

Conclusion

Overall, we feel that Toyota Caetano Portugal certainly does have some positive factors to consider. While no doubt its earnings growth is pretty decent, we do feel that the reinvestment rate is pretty low. Meaning, the earnings growth number could have been significantly higher, had the company been retaining more of its profits. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Toyota Caetano Portugal's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.