Is the recent performance of the Guillemot Corporation SA (EPA:GUI) stock guided by its attractive financial outlook?
Guillemot (EPA:GUI) stock is up 11% over the past week. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. In this article, we decided to focus on Guillemot’s ROE.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
See our latest analysis for Guillemot
How to calculate return on equity?
The ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the formula above, Guillemot’s ROE is:
15% = €14m ÷ €90m (based on the last twelve months to December 2021).
“Yield” refers to a company’s earnings over the past year. One way to conceptualize this is that for every euro of share capital it has, the company has made a profit of 0.15 euro.
What is the relationship between ROE and 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 Guillemot results and 15% ROE
For starters, Guillemot seems to have a respectable ROE. Compared to the industry average ROE of 6.6%, the company’s ROE looks quite remarkable. Probably thanks to this, Guillemot was able to register a decent growth of 12% over the last five years.
Then, when comparing with the industry net income growth, we found that the growth figure reported by Guillemot compares quite favorably to the industry average, which shows a 17% decline over the same period.
Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. Is Guillemot correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Does Guillemot effectively reinvest its profits?
Guillemot’s three-year median payout ratio to shareholders is 15% (implying it keeps 85% of its revenue), which is pretty low, so it looks like management is massively reinvesting earnings to grow its activity.
Additionally, Guillemot has paid dividends over a three-year period, which means the company is pretty serious about sharing its profits with shareholders. 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 17%. As a result, the company’s future ROE is also not expected to change much, with analysts forecasting an ROE of 18%.
Overall, we believe Guillemot’s performance has been quite good. In particular, it is good to see that the company is investing heavily in its business, and together with a high rate of return, this has led to significant growth in its profits. That said, the latest forecasts from industry analysts show that the company’s earnings are set 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.