Yahoo Finance Will Casino Guichard-Perrachon Société Anonyme (EPA:CO) Continue To Underperform Its Industry?
This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Casino Guichard-Perrachon Société Anonyme (EPA:CO).
Casino Guichard-Perrachon Société Anonyme (EPA:CO) delivered a less impressive 2.09% ROE over the past year, compared to the 11.67% return generated by its industry. Though CO’s recent performance is underwhelming, it is useful to understand what ROE is made up of and how it should be interpreted. Knowing these components can change your views on CO’s below-average returns. Today I will look at how components such as financial leverage can influence ROE which may impact the sustainability of CO’s returns. See our latest analysis for Casino Guichard-Perrachon Société Anonyme
Peeling the layers of ROE – trisecting a company’s profitability
Firstly, Return on Equity, or ROE, is simply the percentage of last years’ earning against the book value of shareholders’ equity. An ROE of 2.09% implies €0.021 returned on every €1 invested. In most cases, a higher ROE is preferred; however, there are many other factors we must consider prior to making any investment decisions.
Return on Equity = Net Profit ÷ Shareholders Equity
Returns are usually compared to costs to measure the efficiency of capital. Casino Guichard-Perrachon Société Anonyme’s cost of equity is 13.32%. Since Casino Guichard-Perrachon Société Anonyme’s return does not cover its cost, with a difference of -11.23%, this means its current use of equity is not efficient and not sustainable. Very simply, Casino Guichard-Perrachon Société Anonyme pays more for its capital than what it generates in return. ROE can be dissected into three distinct ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:
Dupont Formula
ROE = profit margin × asset turnover × financial leverage
ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)
ROE = annual net profit ÷ shareholders’ equity
The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. Asset turnover shows how much revenue Casino Guichard-Perrachon Société Anonyme can generate with its current asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since ROE can be artificially increased through excessive borrowing, we should check Casino Guichard-Perrachon Société Anonyme’s historic debt-to-equity ratio. The debt-to-equity ratio currently stands at a sensible 66.80%, meaning the ROE is a result of its capacity to produce profit growth without a huge debt burden.
Next Steps:
While ROE is a relatively simple calculation, it can be broken down into different ratios, each telling a different story about the strengths and weaknesses of a company. Casino Guichard-Perrachon Société Anonyme’s below-industry ROE is disappointing, furthermore, its returns were not even high enough to cover its own cost of equity. However, ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of returns, which has headroom to increase further. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Casino Guichard-Perrachon Société Anonyme, I’ve put together three important aspects you should further examine:
Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Valuation: What is Casino Guichard-Perrachon Société Anonyme worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Casino Guichard-Perrachon Société Anonyme is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Casino Guichard-Perrachon Société Anonyme? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
