Bouygues’ (EPA:EN) stock is up by a considerable 14% over the past month. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Specifically, we decided to study Bouygues’ ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Put another way, it reveals the company’s success at turning shareholder investments into profits.
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How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Bouygues is:
8.1% = €1.1b ÷ €13b (Based on the trailing twelve months to June 2022).
The ‘return’ is the income the business earned over the last year. One way to conceptualize this is that for each €1 of shareholders’ capital it has, the company made €0.08 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
A Side By Side comparison of Bouygues’ Earnings Growth And 8.1% ROE
On the face of it, Bouygues’ ROE is not much to talk about. However, given that the company’s ROE is similar to the average industry ROE of 8.7%, we may spare it some thought. But then again, Bouygues’ five year net income shrunk at a rate of 3.3%. Bear in mind, the company does have a slightly low ROE. So that’s what might be causing earnings growth to shrink.
Next, on comparing with the industry net income growth, we found that Bouygues’ earnings seems to be shrinking at a similar rate as the industry which shrunk at a rate of a rate of 2.8% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. Is EN fairly valued? This infographic on the company’s intrinsic value has everything you need to know.
Is Bouygues Using Its Retained Earnings Effectively?
With a high three-year median payout ratio of 61% (implying that 39% of the profits are retained), most of Bouygues’ profits are being paid to shareholders, which explains the company’s shrinking earnings. The business is only left with a small pool of capital to reinvest – A vicious cycle that doesn’t benefit the company in the long-run. To know the 2 risks we have identified for Bouygues visit our risks dashboard for free.
Moreover, Bouygues has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 50%. However, Bouygues’ ROE is predicted to rise to 10% despite there being no anticipated change in its payout ratio.
Overall, we would be extremely cautious before making any decision on Bouygues. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company’s earnings growth rate. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.