Declining Stock and Solid Fundamentals: Is The Market Wrong About NOS, S.G.P.S., S.A. (ELI:NOS)?

It is hard to get excited after looking at NOS S.G.P.S' (ELI:NOS) recent performance, when its stock has declined 4.8% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How To Calculate Return On Equity?

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 NOS S.G.P.S is:

23% = €264m ÷ €1.1b (Based on the trailing twelve months to March 2025).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.23.

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

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

NOS S.G.P.S' Earnings Growth And 23% ROE

First thing first, we like that NOS S.G.P.S has an impressive ROE. Secondly, even when compared to the industry average of 13% the company's ROE is quite impressive. As a result, NOS S.G.P.S' exceptional 22% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared NOS S.G.P.S' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.8%.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is NOS worth today? The intrinsic value infographic in our free research report helps visualize whether NOS is currently mispriced by the market.

Is NOS S.G.P.S Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 70% (implying that it keeps only 30% of profits) for NOS S.G.P.S suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, NOS S.G.P.S has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 105% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 17%, over the same period.

Conclusion

Overall, we are quite pleased with NOS S.G.P.S' performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. 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.