It’s hard to get excited after looking at Bouygues’ recent performance (EPA: EN), as its stock has fallen 9.0% in the past three months. However, the company’s fundamentals look pretty decent, and long-term financial data is generally aligned with future market price movements. Concretely, we have decided to study Bouygues’ ROE in this article.
Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how efficiently their capital is being reinvested. Simply put, it is used to assess a company’s profitability against its equity.
See our latest analysis for Bouygues
How is the ROE calculated?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, Bouygues’ ROE is:
8.4% = 1.0 billion euros ÷ 12 billion euros (based on the last twelve months up to March 2021).
The “return” is the income the business has earned over the past year. This means that for every € 1 of equity, the company generated € 0.08 in profit.
What does ROE have to do with profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess the profits that the business is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the business. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
A side-by-side comparison of Bouygues’ profit growth and 8.4% ROE
A priori, Bouygues’ ROE seems acceptable. Even so, compared to the industry average ROE of 13%, we’re not very excited. Bouygues has nonetheless recorded decent growth in its net income of 7.5% over the past five years. So, there might be other aspects that positively influence earnings growth. Such as – high profit retention or effective management in place. Keep in mind that the company has a respectable level of ROE. It’s just that the industry’s ROE is higher. This also gives color to the fairly high profit growth observed by the company.
Then, comparing with the growth in net income of the industry, we found that the growth of Bouygues is quite high compared to the industry average growth of 2.6% over the same period, which is great. to have.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for a bright or dark future. What is the EN worth today? The intrinsic value infographic in our free research report helps to visualize whether EN is currently poorly valued by the market.
Is Bouygues making effective use of its retained earnings?
While Bouygues has a three-year median payout rate of 54% (which means it keeps 46% of profits), the company has still seen good profit growth in the past, which means that his high distribution rate did not hinder his ability to grow.
In addition, Bouygues has paid dividends over a period of at least ten years, which means the company is serious enough to share its profits with its shareholders. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 52%. In any event, Bouygues’ future ROE should rise to 11% despite a low expected change in its payout ratio.
Overall, we think Bouygues has strengths. Namely, its significant growth in earnings, to which its moderate rate of return likely contributed. While the company pays out most of its profits as dividends, it was able to increase its profits despite this, so that’s probably a good sign. Looking at current analysts’ estimates, we found that analysts expect the company to continue its recent streak of growth. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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