Yahoo Finance EnviTec Biogas AG's (ETR:ETG) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?
EnviTec Biogas' (ETR:ETG) stock is up by a considerable 14% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study EnviTec Biogas' ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for EnviTec Biogas
How Is ROE Calculated?
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 EnviTec Biogas is:
29% = €48m ÷ €167m (Based on the trailing twelve months to December 2022).
The 'return' refers to a company's earnings over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.29 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
EnviTec Biogas' Earnings Growth And 29% ROE
Firstly, we acknowledge that EnviTec Biogas has a significantly high ROE. Even when compared to the industry average of 27% the company's ROE is pretty decent. As a result, EnviTec Biogas' remarkable 43% net income growth seen over the past 5 years is likely aided by its high ROE.
Next, on comparing EnviTec Biogas' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 43% over the last few years.
Earnings growth is an important metric to consider when valuing a stock. 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. Is EnviTec Biogas fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is EnviTec Biogas Using Its Retained Earnings Effectively?
The really high three-year median payout ratio of 138% for EnviTec Biogas suggests that the company is paying its shareholders more than what it is earning. However, this hasn't hampered its ability to grow as we saw earlier. Although, it could be worth keeping an eye on the high payout ratio as that's a huge risk.
Moreover, EnviTec Biogas is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend.
Summary
On the whole, we do feel that EnviTec Biogas has some positive attributes. Specifically, its high ROE which likely led to the growth in earnings. Bear in mind, the company reinvests little to none of its profits, which means that investors aren't necessarily reaping the full benefits of the high rate of return. Up till now, we've only made a short study of the company's growth data. To gain further insights into EnviTec Biogas' past profit growth, check out this visualization of past earnings, revenue and cash flows.
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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.
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