Unibel SA (EPA: UNBL) shares are skyrocketing but financial data seems inconsistent: will the uptrend continue?

Unibel (EPA: UNBL) had a strong run in the equity market with its stock rising significantly 13% in the past three months. But the company’s key financial metrics appear to differ across the board, leading us to question whether the current momentum in the company’s stock price can be sustained. In particular, we will pay particular attention to Unibel’s ROE today.

Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. Simply put, it is used to assess a company’s profitability against its equity.

See our latest review for Unibel

How is the ROE calculated?

the formula for ROE is:

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

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

6.0% = 110 million euros ÷ 1.8 billion euros (based on the last twelve months up to June 2021).

The “return” is the profit of the last twelve months. One way to conceptualize this is that for every € 1 of share capital it has, the company has made € 0.06 in profit.

What does ROE have to do with profit growth?

So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of those profits the company reinvests or “withholds” and its efficiency, 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.

6.0% profit growth and ROE for Unibel

At first glance, Unibel’s ROE is not much to say. We then compared the company’s ROE to that of the industry as a whole and were disappointed to see that the ROE is below the industry average of 7.7%. For this reason, Unibel’s 12% drop in net profit over five years is not surprising given its lower ROE. We believe there could be other factors at play here as well. For example, the company has a very high payout rate or faces competitive pressures.

Then when we compared with the industry, which cut its profits at a rate of 2.6% over the same period, we always found Unibel’s performance to be quite dismal, as the company has is reducing its profits faster than the industry.

ENXTPA: Growth in past profits of UNBL on December 12, 2021

Profit growth is a huge factor in the valuation of stocks. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. In doing so, he’ll have an idea if the action is heading for clear blue waters or swampy waters ahead. If you are wondering about Unibel’s valuation, take a look at this gauge of its price / earnings ratio, compared to its sector.

Is Unibel using its retained earnings efficiently?

When we put together Unibel’s low three-year median payout ratio of 24% (where it keeps 76% of its profits), calculated for the last three-year period, we are puzzled by the lack of growth. The low payout should mean that the business keeps most of its profits and, therefore, should experience some growth. So there could be other explanations in this regard. For example, the business of the company can deteriorate.

In addition, Unibel has paid dividends over a period of at least ten years, which means that the management of the company is committed to paying dividends even if it means little or no growth in earnings.

Summary

Overall, we believe that the performance shown by Unibel can be open to many interpretations. Even though it appears to be keeping most of its earnings, given the low ROE, investors might not benefit from all of this reinvestment after all. The weak earnings growth suggests that our theory is correct. In conclusion, we would proceed with caution with this company and one way to do it would be to look at the risk profile of the company. To find out about the 2 risks that we have identified for Unibel, visit our risk dashboard free of charge.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 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 documents. Simply Wall St has no position in any of the stocks mentioned.


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