S.P.E.E.H. Hidroelectrica S.A.'s (BVB:H2O) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

With its stock down 2.4% over the past month, it is easy to disregard S.P.E.E.H. Hidroelectrica (BVB:H2O). 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. 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.

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

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

21% = RON4.7b ÷ RON22b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. So, this means that for every RON1 of its shareholder's investments, the company generates a profit of RON0.21.

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. 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 21% ROE

At first glance, S.P.E.E.H. Hidroelectrica seems to have a decent ROE. Especially when compared to the industry average of 9.2% the company's ROE looks pretty impressive. Probably as a result of this, S.P.E.E.H. Hidroelectrica was able to see an impressive net income growth of 23% over the last five years. We reckon that there could also be other factors at play here. 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 25% over the last few years.

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. 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?

The high three-year median payout ratio of 99% (implying that it keeps only 1.3% of profits) for S.P.E.E.H. Hidroelectrica suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 92% of its profits over the next three years. Accordingly, forecasts suggest that S.P.E.E.H. Hidroelectrica's future ROE will be 20% which is again, similar to the current ROE.

Conclusion

Overall, we feel that S.P.E.E.H. Hidroelectrica certainly does have some positive factors to consider. 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. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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

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.