Is the solid financial outlook the driving force behind Somfy SA’s EPA: SO) action?
Somfy (EPA: SO) had a good run on the equity market with its share up significantly by 8.4% over the last month. Since the market typically pays for a company’s long-term fundamentals, we decided to study the company’s KPIs to see if they could influence the market. In particular, we will pay particular attention to Somfy’s ROE today.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest analysis for Somfy
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, Somfy’s ROE is:
18% = 213 million euros Ã· 1.2 billion euros (based on the last twelve months up to December 2020).
The âreturnâ is the amount earned after tax over the past twelve months. One way to conceptualize this is that for every â¬ 1 of share capital it has, the company has made â¬ 0.18 in profit.
What does ROE have to do with profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on how much of those profits the company reinvests or âwithholdsâ and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
Growth in Somfy’s profits and 18% ROE
To begin with, Somfy’s ROE seems acceptable. Even compared to the industry average of 16%, the company’s ROE looks pretty decent. Somfy’s decent returns are not reflected in Somfy’s five-year average net income growth of 3.8%. Thus, there could be other factors at play that could impact the growth of the business. For example, the company pays out a large portion of its profits as dividends or faces competitive pressures.
As a next step, we compared Somfy’s net income growth with the industry and found that the company has a similar growth figure compared to the industry average growth rate of 3.8% over the course of the same period.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for a bright or dark future. Is Somfy just valued compared to other companies? These 3 evaluation measures could help you decide.
Is Somfy effectively using its carry over again?
Despite a normal three-year median payout rate of 28% (or a retention rate of 72% over the past three years, Somfy has experienced very low revenue growth as seen above. Therefore, there could be other reasons for the lack in this regard, for example, the business could be in decline.
In addition, Somfy has paid dividends over a period of at least ten years, which means that the management of the company is determined to pay dividends even if it means little or no growth in profits. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 29%. Thus, forecasts suggest that Somfy’s future ROE will be 16%, which is again similar to the current ROE.
Overall, we are quite satisfied with Somfy’s performance. In particular, we like the fact that the company is reinvesting heavily in its business and at a high rate of return. As a result, its decent profit growth is not surprising. That said, looking at current analysts’ estimates, we found that the company’s earnings are expected to accelerate. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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