Should Weakness in S.P.E.E.H. Hidroelectrica S.A.'s (BVB:H2O) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

It is hard to get excited after looking at S.P.E.E.H. Hidroelectrica's (BVB:H2O) recent performance, when its stock has declined 3.0% over the past month. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on S.P.E.E.H. Hidroelectrica's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How Is ROE Calculated?

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:

14% = RON3.4b ÷ RON23b (Based on the trailing twelve months to March 2025).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each RON1 of shareholders' capital it has, the company made RON0.14 in profit.

Check out our latest analysis for S.P.E.E.H. Hidroelectrica

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

A Side By Side comparison of S.P.E.E.H. Hidroelectrica's Earnings Growth And 14% ROE

To start with, S.P.E.E.H. Hidroelectrica's ROE looks acceptable. On comparing with the average industry ROE of 11% the company's ROE looks pretty remarkable. This certainly adds some context to S.P.E.E.H. Hidroelectrica's decent 12% net income growth seen over the past five years.

As a next step, we compared S.P.E.E.H. Hidroelectrica'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 27% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is H2O fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is S.P.E.E.H. Hidroelectrica Efficiently Re-investing Its Profits?

While S.P.E.E.H. Hidroelectrica has a three-year median payout ratio of 98% (which means it retains 1.7% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 98%. Still, forecasts suggest that S.P.E.E.H. Hidroelectrica's future ROE will rise to 20% even though the the company's payout ratio is not expected to change by much.

Summary

Overall, we feel that S.P.E.E.H. Hidroelectrica certainly does have some positive factors to consider. The company has grown its earnings moderately as a result of its impressive ROE. Yet, the business is retaining hardly any of its profits. This might have negative implications on the company's future growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.