Are Corticeira Amorim, S.G.P.S., S.A.'s (ELI:COR) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

With its stock down 5.1% over the past three months, it is easy to disregard Corticeira Amorim S.G.P.S (ELI:COR). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Corticeira Amorim S.G.P.S' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Corticeira Amorim S.G.P.S

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 Corticeira Amorim S.G.P.S is:

13% = €73m ÷ €560m (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.13.

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. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Corticeira Amorim S.G.P.S' Earnings Growth And 13% ROE

To start with, Corticeira Amorim S.G.P.S' ROE looks acceptable. Further, the company's ROE is similar to the industry average of 12%. However, we are curious as to how Corticeira Amorim S.G.P.S' decent returns still resulted in flat growth for Corticeira Amorim S.G.P.S in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. These include low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that Corticeira Amorim S.G.P.S' reported growth was lower than the industry growth of 7.2% in the same period, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. 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 COR worth today? The intrinsic value infographic in our free research report helps visualize whether COR is currently mispriced by the market.

Is Corticeira Amorim S.G.P.S Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 33% (meaning the company retains67% of profits) in the last three-year period, Corticeira Amorim S.G.P.S' earnings growth was more or les flat. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, Corticeira Amorim S.G.P.S has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 38%. As a result, Corticeira Amorim S.G.P.S' ROE is not expected to change by much either, which we inferred from the analyst estimate of 15% for future ROE.

Conclusion

Overall, we feel that Corticeira Amorim S.G.P.S certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. 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. 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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