Are Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's (EPA:BAIN) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco (EPA:BAIN) has had a rough three months with its share price down 22%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco is:

3.7% = €25m ÷ €685m (Based on the trailing twelve months to September 2019).

The 'return' is the profit over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.04.

Why Is ROE Important For Earnings Growth?

So far, we've learnt that ROE is a measure of a company's profitability. 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 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.

Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's Earnings Growth And 3.7% ROE

On the face of it, Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's ROE is not much to talk about. Next, when compared to the average industry ROE of 6.7%, the company's ROE leaves us feeling even less enthusiastic. However, the moderate 13% net income growth seen by Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco over the past five years is definitely a positive. So, there might be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 15% in the same period.

ENXTPA:BAIN Past Earnings Growth May 26th 2020

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco Using Its Retained Earnings Effectively?

In Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 0.8% (or a retention ratio of 99%), which suggests that the company is investing most of its profits to grow its business.

Conclusion

On the whole, we do feel that Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 1 risk we have identified for Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco by visiting our risks dashboard for free on our platform here.

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This article by Simply Wall St is general in nature. 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. Thank you for reading.