Falling stocks and solid fundamentals: is the market wrong on UCB SA (EBR: UCB)?

UCB (EBR:UCB) had a tough month with a 24% drop in its share price. But if you pay close attention, you might realize that its strong financials could mean the stock could potentially see a long-term rise in value, as the markets generally reward companies in good financial shape. Specifically, we decided to study UCB’s ROE in this article.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

Discover our latest analysis for UCB

How to calculate return on equity?

ROE can be calculated using the formula:

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

So, based on the above formula, the ROE for UCB is:

13% = €1.1 billion ÷ €8.4 billion (based on the last twelve months until December 2021).

The “yield” is the amount earned after tax over the last twelve months. This means that for every €1 of equity, the company generated €0.13 of profit.

What does ROE have to do with earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. 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.

UCB earnings growth and ROE of 13%

At first glance, UCB seems to have a decent ROE. And comparing with the industry, we found that the industry average ROE is similar at 13%. This certainly adds some context to UCB’s moderate 7.7% net income growth seen over the past five years.

We then performed a comparison between UCB’s net income growth and that of the industry, which revealed that the company’s growth is similar to the average industry growth of 7.3% over the of the same period.

ENXTBR: UCB Past Earnings Growth May 16, 2022

Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. A 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 outlook. Thus, you might want to check whether UCB is trading on a high P/E or on a low P/E, relative to its sector.

Is UCB using its retained earnings efficiently?

With a three-year median payout ratio of 29% (implying the company retains 71% of its earnings), it appears that UCB is reinvesting effectively so as to see respectable earnings growth and paying a well-rounded dividend. covered. .

Moreover, UCB has paid dividends over a period of at least ten years, which means that the company is quite serious about sharing its profits with its shareholders. Existing analyst estimates suggest the company’s future payout ratio is likely to drop to 21% over the next three years. However, the company’s ROE is not expected to change much despite the lower expected payout ratio.

Summary

Overall, we are quite satisfied with UCB’s performance. In particular, we appreciate the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive earnings growth. 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.

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

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