Are NOS, S.G.P.S., S.A.'s (ELI:NOS) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

With its stock down 20% over the past three months, it is easy to disregard NOS S.G.P.S (ELI:NOS). It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Specifically, we decided to study NOS S.G.P.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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for NOS S.G.P.S

How Do You Calculate Return On Equity?

Return on equity 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 NOS S.G.P.S is:

8.3% = €78m ÷ €944m (Based on the trailing twelve months to September 2020).

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

NOS S.G.P.S' Earnings Growth And 8.3% ROE

At first glance, NOS S.G.P.S' ROE doesn't look very promising. Next, when compared to the average industry ROE of 11%, the company's ROE leaves us feeling even less enthusiastic. Although, we can see that NOS S.G.P.S saw a modest net income growth of 6.4% over the past five years. We reckon that there could be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared NOS S.G.P.S' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 6.2% in the same period.

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 NOS S.G.P.S''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

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

The really high three-year median payout ratio of 124% for NOS S.G.P.S suggests that the company is paying its shareholders more than what it is earning. However, this hasn't really hampered its ability to grow as we saw earlier. That being said, the high payout ratio could be worth keeping an eye on in case the company is unable to keep up its current growth momentum. To know the 5 risks we have identified for NOS S.G.P.S visit our risks dashboard for free.

Additionally, NOS S.G.P.S has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 104%. However, NOS S.G.P.S' ROE is predicted to rise to 16% despite there being no anticipated change in its payout ratio.

Conclusion

On the whole, we feel that the performance shown by NOS S.G.P.S can be open to many interpretations. While the company has posted impressive earnings growth, its poor ROE and low earnings retention makes us doubtful if that growth could continue, if by any chance the business is faced with any sort of risk. 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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