Will Weakness in S.N. Nuclearelectrica S.A.'s (BVB:SNN) Stock Prove Temporary Given Strong Fundamentals?

With its stock down 4.2% over the past week, it is easy to disregard S.N. Nuclearelectrica (BVB:SNN). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study S.N. Nuclearelectrica's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for S.N. Nuclearelectrica

How To 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.N. Nuclearelectrica is:

26% = RON2.7b ÷ RON10b (Based on the trailing twelve months to December 2022).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each RON1 of shareholders' capital it has, the company made RON0.26 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.N. Nuclearelectrica's Earnings Growth And 26% ROE

To begin with, S.N. Nuclearelectrica has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 10.0% also doesn't go unnoticed by us. As a result, S.N. Nuclearelectrica's exceptional 42% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing with the industry net income growth, we found that S.N. Nuclearelectrica's growth is quite high when compared to the industry average growth of 7.1% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about S.N. Nuclearelectrica's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is S.N. Nuclearelectrica Using Its Retained Earnings Effectively?

S.N. Nuclearelectrica has a significant three-year median payout ratio of 66%, meaning the company only retains 34% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Additionally, S.N. Nuclearelectrica has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders. 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 55%. However, S.N. Nuclearelectrica's future ROE is expected to decline to 17% despite there being not much change anticipated in the company's payout ratio.

Summary

Overall, we are quite pleased with S.N. Nuclearelectrica's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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.