In This Article:
Eurocell (LON:ECEL) has had a rough three months with its share price down 19%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Eurocell's ROE.
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.
View our latest analysis for Eurocell
How Do You Calculate Return On Equity?
Return on equity 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:
12% = UK£13m ÷ UK£107m (Based on the trailing twelve months to June 2024).
The 'return' is the yearly profit. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.12 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. 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.
Eurocell's Earnings Growth And 12% ROE
To start with, Eurocell's ROE looks acceptable. Even when compared to the industry average of 10% the company's ROE looks quite decent. Eurocell's decent returns aren't reflected in Eurocell'smediocre five year net income growth average of 2.9%. A few likely reasons that could be keeping earnings growth low are - the company has a high payout ratio or the business has allocated capital poorly, for instance.
As a next step, we compared Eurocell's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 4.1% 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. What is ECEL worth today? The intrinsic value infographic in our free research report helps visualize whether ECEL is currently mispriced by the market.