Are Strong Financial Prospects The Force That Is Driving The Momentum In Rémy Cointreau SA's EPA:RCO) Stock?
Most readers would already be aware that Rémy Cointreau's (EPA:RCO) stock increased significantly by 13% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Rémy Cointreau'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Rémy Cointreau
How Is ROE Calculated?
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 Rémy Cointreau is:
11% = €156m ÷ €1.4b (Based on the trailing twelve months to September 2019).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.11 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learnt that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
A Side By Side comparison of Rémy Cointreau's Earnings Growth And 11% ROE
To begin with, Rémy Cointreau seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 4.7%. This probably laid the ground for Rémy Cointreau's moderate 15% net income growth seen over the past five years.
When you consider the fact that the industry earnings have shrunk at a rate of 3.6% in the same period, the company's net income growth is pretty remarkable.
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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Rémy Cointreau is trading on a high P/E or a low P/E, relative to its industry.
Is Rémy Cointreau Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 67% (or a retention ratio of 33%) for Rémy Cointreau suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Moreover, Rémy Cointreau is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 54% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.
Summary
Overall, we are quite pleased with Rémy Cointreau's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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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.
