Is the recent stock market performance of EDP Renováveis, SA (ELI: EDPR) influenced by its fundamentals?
Most readers already know that EDP RenovÃ¡veis ââ(ELI: EDPR) stock has increased significantly by 16% in the past three months. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . We will be paying special attention to EDP RenovÃ¡veis’ ROE today.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest review for EDP RenovÃ¡veis
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for EDP RenovÃ¡veis ââis:
5.5% = 558 million euros Ã· 10 billion euros (based on the last twelve months up to June 2021).
“Return” refers to a company’s profits over the past year. This means that for every â¬ 1 of equity, the company generated â¬ 0.06 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. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. 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 EDP RenovÃ¡veis’ 5.5% profit growth and ROE
At first glance, EDP RenovÃ¡veis’ ROE is not much to say. Then, compared to the industry average ROE of 7.9%, the company’s ROE leaves us even less enthusiastic. Despite this, EDP RenovÃ¡veis ââhas been able to significantly increase its bottom line, at a rate of 30% over the past five years. Therefore, there could be other reasons behind this growth. For example, the business has a low payout ratio or is managed efficiently.
As a next step, we compared the net income growth of EDP RenovÃ¡veis ââwith the industry, and luckily we found that the growth observed by the company is higher than the industry average growth by 11%. .
Profit growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. If you are wondering about the valuation of EDP RenovÃ¡veis, take a look at this gauge of its price / earnings ratio, compared to its sector.
Is EDP RenovÃ¡veis ââusing its profits efficiently?
EDP ââRenovÃ¡veis ââhas a very low three-year median payout rate of 18%, which means it has the remaining 82% to reinvest in its business. This suggests that management is reinvesting most of the profits to grow the business, as evidenced by the growth seen by the business.
In addition, EDP RenovÃ¡veis ââhas paid dividends over a nine-year period, which means the company is very serious about sharing 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 16%. Nonetheless, forecasts suggest that EDP RenovÃ¡veis’ future ROE will reach 7.0%, although the company’s payout ratio is not expected to change much.
All in all, it seems that EDP RenovÃ¡veis ââhas positive aspects for its activity. Even despite the low rate of return, the company has shown impressive profit growth by reinvesting heavily in its operations. That said, the company’s earnings growth is expected to slow, as current analyst estimates predict. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. 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 material. Simply Wall St has no position in the mentioned stocks.
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