Cheffelo AB (publ)'s (STO:CHEF) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Most readers would already be aware that Cheffelo's (STO:CHEF) stock increased significantly by 23% over the past month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to Cheffelo's ROE today.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Cheffelo

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Cheffelo is:

5.9% = kr24m ÷ kr413m (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. So, this means that for every SEK1 of its shareholder's investments, the company generates a profit of SEK0.06.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Cheffelo's Earnings Growth And 5.9% ROE

On the face of it, Cheffelo's ROE is not much to talk about. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 10%. Despite this, surprisingly, Cheffelo saw an exceptional 45% net income growth over the past five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Cheffelo's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 4.5%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Cheffelo fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Cheffelo Making Efficient Use Of Its Profits?

The high LTM (or last twelve month) payout ratio of 93% (implying that it keeps only 7.0% of profits) for Cheffelo suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, Cheffelo has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 88%. Regardless, the future ROE for Cheffelo is predicted to rise to 9.6% despite there being not much change expected in its payout ratio.

Conclusion

Overall, we have mixed feelings about Cheffelo. While no doubt its earnings growth is pretty substantial, its ROE and earnings retention is quite poor. So while the company has managed to grow its earnings in spite of this, we are unconvinced if this growth could extend, especially during troubled times. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.