The fundamentals of Gérard Perrier Industrie SA (EPA:PERR) seem quite solid: could the market be wrong about the stock?
With a stock down 13% over the past month, it is easy to ignore Gérard Perrier Industrie (EPA:PERR). However, stock prices are usually determined by a company’s long-term financial performance, which in this case looks quite promising. We will be paying particular attention today to Gérard Perrier Industrie’s ROE.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simpler terms, it measures a company’s profitability relative to equity.
Discover our latest analyzes for Gérard Perrier Industrie
How do you calculate return on equity?
the return on equity formula East:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the formula above, the ROE of Gérard Perrier Industrie is:
18% = €15m ÷ €82m (based on the last twelve months until June 2021).
The “return” is the annual profit. This means that for every €1 of equity, the company generated €0.18 of profit.
What does ROE have to do with earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s 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.
Growth in results and 18% ROE for Gérard Perrier Industrie
A priori, Gérard Perrier Industrie’s ROE seems acceptable. Even when compared to the industry average of 16%, the company’s ROE looks pretty decent. Despite a moderate return on equity, Gérard Perrier Industrie has posted net profit growth of 4.1% over the past five years. We believe that low growth, when returns are moderate, could be the result of certain circumstances such as low earnings retention or poor capital allocation.
Next, comparing Gerard Perrier Industrie’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 4.5% over the same period.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps them determine whether the action is placed for a bright or bleak future. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if Gerard Perrier Industrie is trading on a high P/E or a low P/E, relative to its industry.
Does Gérard Perrier Industrie use its profits efficiently?
Despite a moderate three-year median payout ratio of 48% (implying that the company retains the remaining 52% of its revenue), Gerard Perrier Industrie’s earnings growth has been quite weak. Therefore, there could be other reasons for the lack in this regard. For example, the business might be in decline.
Moreover, Gérard Perrier Industrie has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders preferred dividends to earnings growth. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to remain stable at 44%. Thus, forecasts suggest that the future ROE of Gérard Perrier Industrie will be 19%, which is again similar to the current ROE.
Overall, we are quite satisfied with the performance of Gérard Perrier Industrie. Specifically, we like that the company reinvests a large portion of its earnings at a high rate of return. This of course led the company to see good growth in profits. That said, looking at current analyst estimates, we found that the company’s earnings are expected to accelerate. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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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.