EnviTec Biogas AG (ETR:ETG) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?
It is hard to get excited after looking at EnviTec Biogas' (ETR:ETG) recent performance, when its stock has declined 13% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on EnviTec Biogas' ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for EnviTec Biogas
How Do You 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 EnviTec Biogas is:
18% = €27m ÷ €151m (Based on the trailing twelve months to June 2022).
The 'return' is the income the business earned over the last year. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.18.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
EnviTec Biogas' Earnings Growth And 18% ROE
To start with, EnviTec Biogas' ROE looks acceptable. Yet, the fact that the company's ROE is lower than the industry average of 23% does temper our expectations. However, we are pleased to see the impressive 34% net income growth reported by EnviTec Biogas over the past five years. Therefore, there could be other causes behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio. Bear in mind, the company does have a respectable ROE. It is just that the industry ROE is higher. So this also does lend some color to the high earnings growth seen by the company.
Next, on comparing EnviTec Biogas' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 31% in the same period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about EnviTec Biogas''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is EnviTec Biogas Using Its Retained Earnings Effectively?
The really high three-year median payout ratio of 147% for EnviTec Biogas suggests that the company is paying its shareholders more than what it is earning. In spite of this, the company was able to grow its earnings significantly, as we saw above. Although, it could be worth keeping an eye on the high payout ratio as that's a huge risk.
Moreover, EnviTec Biogas is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend.
Conclusion
In total, it does look like EnviTec Biogas has some positive aspects to its business. Especially the growth in earnings which was backed by a moderate ROE. Still, the ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be negligible. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into EnviTec Biogas' past profit growth, check out this visualization of past earnings, revenue and cash flows.
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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.
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