Galp Energia, SGPS, S.A.'s (ELI:GALP) Recent Stock Performance Looks Decent- Can Strong Fundamentals Be the Reason?

Most readers would already know that Galp Energia SGPS' (ELI:GALP) stock increased by 1.3% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Galp Energia SGPS' 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Galp Energia SGPS

How To 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 Galp Energia SGPS is:

30% = €1.6b ÷ €5.4b (Based on the trailing twelve months to September 2023).

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 €0.30 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Galp Energia SGPS' Earnings Growth And 30% ROE

Firstly, we acknowledge that Galp Energia SGPS has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 16% which is quite remarkable. So, the substantial 27% net income growth seen by Galp Energia SGPS over the past five years isn't overly surprising.

Next, on comparing Galp Energia SGPS' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 24% over the last few years.

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. Doing so will help them establish if the stock's future looks promising or ominous. What is GALP worth today? The intrinsic value infographic in our free research report helps visualize whether GALP is currently mispriced by the market.

Is Galp Energia SGPS Efficiently Re-investing Its Profits?

Galp Energia SGPS' three-year median payout ratio is a pretty moderate 29%, meaning the company retains 71% of its income. By the looks of it, the dividend is well covered and Galp Energia SGPS is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Galp Energia SGPS is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 40% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 18%) over the same period.

Summary

Overall, we are quite pleased with Galp Energia SGPS' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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.