Is S.P.E.E.H. Hidroelectrica S.A.'s (BVB:H2O) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

S.P.E.E.H. Hidroelectrica (BVB:H2O) has had a great run on the share market with its stock up by a significant 10% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study S.P.E.E.H. Hidroelectrica's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for S.P.E.E.H. Hidroelectrica

How To Calculate Return On Equity?

ROE 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 S.P.E.E.H. Hidroelectrica is:

25% = RON6.4b ÷ RON25b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. That means that for every RON1 worth of shareholders' equity, the company generated RON0.25 in profit.

What Has ROE Got To Do With 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.

S.P.E.E.H. Hidroelectrica's Earnings Growth And 25% ROE

To begin with, S.P.E.E.H. Hidroelectrica seems to have a respectable ROE. Especially when compared to the industry average of 8.6% the company's ROE looks pretty impressive. This probably laid the ground for S.P.E.E.H. Hidroelectrica's significant 26% net income growth seen over the past five years. However, there could also be other causes behind this growth. 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 S.P.E.E.H. Hidroelectrica'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 30% in the same period.

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. What is H2O worth today? The intrinsic value infographic in our free research report helps visualize whether H2O is currently mispriced by the market.

Is S.P.E.E.H. Hidroelectrica Making Efficient Use Of Its Profits?

S.P.E.E.H. Hidroelectrica has a significant three-year median payout ratio of 93%, meaning the company only retains 7.2% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

While S.P.E.E.H. Hidroelectrica has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. 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 95%. However, S.P.E.E.H. Hidroelectrica's future ROE is expected to decline to 18% despite there being not much change anticipated in the company's payout ratio.

Conclusion

On the whole, we do feel that S.P.E.E.H. Hidroelectrica has some positive attributes. Namely, its high earnings growth, which was likely due to its high ROE. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining hardly any of its profits. 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 company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.