EssilorLuxottica Société anonyme (EPA:EL) is doing well but fundamentals look mixed: is there a clear direction for the stock?

EssilorLuxottica Société Anonyme (EPA:EL) stock is up a whopping 15% over the past month. However, we wonder if the company’s inconsistent financial statements would negatively impact the current share price dynamics. We will be paying particular attention today to the ROE of EssilorLuxottica Société anonyme.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

See our latest analysis for EssilorLuxottica Société anonyme

How do you calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

Thus, based on the formula above, the ROE of EssilorLuxottica Société anonyme is:

5.0% = €1.9 billion ÷ €39 billion (based on the last twelve months until June 2022).

The “return” is the annual profit. One way to conceptualize this is that for every euro of share capital it has, the company has made a profit of 0.05 euro.

Why is ROE important for earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Based on the share 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 unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.

Growth in results and ROE of 5.0% for EssilorLuxottica Société anonyme

At first sight, the ROE of EssilorLuxottica Société anonyme does not look very promising. However, its ROE is similar to the industry average of 5.0%, so we won’t dismiss the company altogether. That said, EssilorLuxottica Société anonyme has posted modest net income growth of 5.4% over the past five years. Considering the fact that ROE is not particularly high, we believe that there could also be other factors at play that could influence the growth of the business. Such as – high revenue retention or effective management in place.

Next, we benchmarked EssilorLuxottica Société anonyme net income growth against the industry and were disappointed to find that the company’s growth was below the industry average growth of 20% over the same period.

ENXTPA: EL Past Earnings Growth October 31, 2022

Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. Has the market priced in EL’s future prospects? You can find out in our latest infographic research report on intrinsic value.

Does EssilorLuxottica Société anonyme effectively reinvest its profits?

The high three-year median payout rate of 65% (equivalent to a retention rate of 35%) for EssilorLuxottica Société anonyme suggests that the company’s growth has not been significantly hampered despite the fact that it pays the major part of its income to its shareholders.

Furthermore, EssilorLuxottica Société anonyme is determined to continue sharing its profits with shareholders, which we infer from its long history of distributing dividends for at least ten years. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be approximately 52%. However, the ROE of EssilorLuxottica Société anonyme is expected to increase to 8.7% despite the absence of any anticipated change in its payout ratio.

Conclusion

Overall, we have mixed feelings about EssilorLuxottica Société anonyme. Although the company has shown fairly strong earnings growth, the rate of reinvestment is low. This means that the earnings growth figure could have been significantly higher had the company retained more of its earnings and reinvested it at a higher rate of return. That said, the latest forecasts from industry analysts show that the company’s earnings are set to accelerate. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

Valuation is complex, but we help make it simple.

Find out if EssilorLuxottica Public limited company is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

See the free analysis

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

About Meredith Campagna

Check Also

SBP injects 675 billion rupees into banks

CARACHI: The State Bank of Pakistan (SBP) has injected more than 675 billion rupees into …