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Befesa (ETR:BFSA) has had a rough three months with its share price down 32%. We decided to study the company’s financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Particularly, we will be paying attention to Befesa’s ROE today.
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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
View our latest analysis for Befesa
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 Befesa is:
7.2% = €56m ÷ €777m (Based on the trailing twelve months to September 2024).
The ‘return’ is the yearly profit. So, this means that for every €1 of its shareholder’s investments, the company generates a profit of €0.07.
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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.
At first glance, Befesa’s ROE doesn’t look very promising. However, its ROE is similar to the industry average of 7.3%, so we won’t completely dismiss the company. But Befesa saw a five year net income decline of 2.3% over the past five years. Bear in mind, the company does have a slightly low ROE. Hence, this goes some way in explaining the shrinking earnings.
However, when we compared Befesa’s growth with the industry we found that while the company’s earnings have been shrinking, the industry has seen an earnings growth of 26% in the same period. This is quite worrisome.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Befesa fairly valued compared to other companies? These 3 valuation measures might help you decide.