Eurocell plc (LON:ECEL) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

editorial-team@simplywallst.com (Simply Wall St)

Wed, Aug 28, 2024, 12:47 AM 3 min read

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

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

8.4% = UK£9.6m ÷ UK£114m (Based on the trailing twelve months to December 2023).

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 £0.08.

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. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Eurocell's Earnings Growth And 8.4% ROE

On the face of it, Eurocell's ROE is not much to talk about. Next, when compared to the average industry ROE of 11%, the company's ROE leaves us feeling even less enthusiastic. Therefore, Eurocell's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Eurocell's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 4.7% in the same 5-year period, which is a bit concerning.

past-earnings-growth — LSE:ECEL Past Earnings Growth August 28th 2024

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is ECEL worth today? The intrinsic value infographic in our free research report helps visualize whether ECEL is currently mispriced by the market.

Is Eurocell Efficiently Re-investing Its Profits?

In spite of a normal three-year median payout ratio of 50% (or a retention ratio of 50%), Eurocell hasn't seen much growth in its earnings. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, Eurocell has been paying dividends over a period of nine years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 50% of its profits over the next three years.

Conclusion

In total, we're a bit ambivalent about Eurocell's performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.