The fundamentals of Bouygues SA (EPA:EN) look quite solid: could the market be wrong about the stock?

It’s hard to get excited after watching the recent performance of Bouygues (EPA:EN), as its stock is down 7.8% in the past three months. However, a closer look at his healthy finances might make you think again. Since fundamentals generally determine long-term market outcomes, the company is worth looking into. Concretely, we have chosen to study the ROE of Bouygues in this article.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

See our latest analysis for Bouygues

How to calculate return on equity?

the return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

Thus, according to the above formula, Bouygues’ ROE is:

11% = €1.3 billion ÷ €12 billion (based on the last twelve months until September 2021).

“Yield” refers to a company’s earnings over the past year. This therefore means that for each €1 of investment by its shareholder, the company generates a profit of €0.11.

What does ROE have to do with earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of Bouygues’ earnings growth and 11% ROE

At first glance, Bouygues seems to have a decent ROE. Even compared to the industry average of 11%, the company’s ROE looks pretty decent. Bouygues’ decent returns are not reflected in Bouygues’ mediocre five-year average net income growth of 3.9%. Some likely reasons that could keep earnings growth low are: the company has a high payout ratio or the company has misallocated capital, for example.

Given that the industry has been shrinking profits at a rate of 5.6% over the same period, the company’s net profit growth is quite impressive.

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. Is EN valued enough? This intrinsic business value infographic has everything you need to know.

Does Bouygues make effective use of its retained earnings?

With a high three-year median payout ratio of 53% (or a retention rate of 47%), the bulk of Bouygues’ profits are returned to shareholders. This certainly contributes to the weak earnings growth the company has seen.

Additionally, Bouygues has paid dividends over a period of at least ten years, which means the company’s management is determined to pay dividends even if it means little or no earnings growth. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be approximately 47%. As a result, Bouygues’ ROE should not change much either, which we have inferred from analysts’ estimate of 11% for future ROE.

Summary

Overall, we consider Bouygues’ performance to be quite good. In particular, its high ROE is quite remarkable and also the likely explanation for its considerable earnings growth. Yet the company retains a small portion of its profits. Which means the company was able to increase its profits despite this, so it’s not that bad. That said, looking at current analyst estimates, we have seen that the company’s earnings are expected to accelerate. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.