Should Weakness in Corticeira Amorim, S.G.P.S., S.A.'s (ELI:COR) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

Corticeira Amorim S.G.P.S (ELI:COR) has had a rough month with its share price down 3.9%. 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Corticeira Amorim S.G.P.S

How Is ROE Calculated?

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 Corticeira Amorim S.G.P.S is:

15% = €111m ÷ €745m (Based on the trailing twelve months to December 2022).

The 'return' is the yearly profit. That means that for every €1 worth of shareholders' equity, the company generated €0.15 in profit.

What Has ROE Got To Do With Earnings Growth?

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

A Side By Side comparison of Corticeira Amorim S.G.P.S' Earnings Growth And 15% ROE

At first glance, Corticeira Amorim S.G.P.S seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 13%. 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. So, there could be some other aspects that could potentially be preventing the company from growing. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared Corticeira Amorim S.G.P.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 11% in the same period.

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 Using Its Retained Earnings Effectively?

In spite of a normal three-year median payout ratio of 36% (or a retention ratio of 64%), Corticeira Amorim S.G.P.S hasn't seen much growth in its earnings. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Corticeira Amorim S.G.P.S has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings 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 40%. 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 14% for future ROE.

Summary

On the whole, we do feel that Corticeira Amorim S.G.P.S has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.