S.P.E.E.H. Hidroelectrica S.A.'s (BVB:H2O) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

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 7.2% over the past three months. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to S.P.E.E.H. Hidroelectrica'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.

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

How Is ROE Calculated?

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

23% = RON6.0b ÷ RON26b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. That means that for every RON1 worth of shareholders' equity, the company generated RON0.23 in profit.

Why Is ROE Important For Earnings Growth?

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

S.P.E.E.H. Hidroelectrica's Earnings Growth And 23% ROE

At first glance, S.P.E.E.H. Hidroelectrica seems to have a decent ROE. Especially when compared to the industry average of 8.7% the company's ROE looks pretty impressive. This probably laid the ground for S.P.E.E.H. Hidroelectrica's significant 30% net income growth seen over the past five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing S.P.E.E.H. Hidroelectrica's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 31% over the last few years.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. 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 Making Efficient Use Of Its Profits?

S.P.E.E.H. Hidroelectrica's significant three-year median payout ratio of 97% (where it is retaining only 2.9% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

While S.P.E.E.H. Hidroelectrica has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 95% of its profits over the next three years. As a result, S.P.E.E.H. Hidroelectrica's ROE is not expected to change by much either, which we inferred from the analyst estimate of 18% for future ROE.

Conclusion

On the whole, we do feel that S.P.E.E.H. Hidroelectrica has some positive attributes. Especially the growth in earnings which was backed by an impressive ROE. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be negligible. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings 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.

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