Are Poor Financial Prospects Dragging Down SC Arteca Jilava SA (BVB:ARJI Stock?

It is hard to get excited after looking at SC Arteca Jilava's (BVB:ARJI) recent performance, when its stock has declined 29% over the past week. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Particularly, we will be paying attention to SC Arteca Jilava's ROE today.

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.

Check out our latest analysis for SC Arteca Jilava

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 SC Arteca Jilava is:

2.8% = RON744k ÷ RON27m (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. That means that for every RON1 worth of shareholders' equity, the company generated RON0.03 in profit.

Why Is ROE Important For Earnings Growth?

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

SC Arteca Jilava's Earnings Growth And 2.8% ROE

It is hard to argue that SC Arteca Jilava's ROE is much good in and of itself. Even compared to the average industry ROE of 4.0%, the company's ROE is quite dismal. For this reason, SC Arteca Jilava's five year net income decline of 16% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.

However, when we compared SC Arteca Jilava's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 11% in the same period. This is quite worrisome.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is SC Arteca Jilava fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is SC Arteca Jilava Efficiently Re-investing Its Profits?

SC Arteca Jilava's high three-year median payout ratio of 204% suggests that the company is depleting its resources to keep up its dividend payments, and this shows in its shrinking earnings. Its usually very hard to sustain dividend payments that are higher than reported profits. You can see the 5 risks we have identified for SC Arteca Jilava by visiting our risks dashboard for free on our platform here.

Moreover, SC Arteca Jilava has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

On the whole, SC Arteca Jilava's performance is quite a big let-down. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of SC Arteca Jilava's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com