December 4, 2021

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Are Sabaf S.p.A.’s (BIT:SAB) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

It is hard to get excited after looking at Sabaf’s (BIT:SAB) recent performance, when its stock has declined 19% over the past three months. It is possible that the markets have ignored the company’s differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company’s financial performance. Specifically, we decided to study Sabaf’s ROE in this article.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Sabaf

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 Sabaf is:

8.4% = €10m ÷ €121m (Based on the trailing twelve months to December 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 €0.08 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we’ve learnt that ROE is a measure of a company’s profitability. 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.

Sabaf’s Earnings Growth And 8.4% ROE

On the face of it, Sabaf’s ROE is not much to talk about. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 14% either. Although, we can see that Sabaf saw a modest net income growth of 10% over the past five years. So, there might be other aspects that are positively influencing the company’s earnings growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Sabaf’s net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 14% in the same period, which is a bit concerning.

BIT:SAB Past Earnings Growth April 29th 2020

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. Is Sabaf fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sabaf Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 51% (or a retention ratio of 49%) for Sabaf suggests that the company’s growth wasn’t really hampered despite it returning most of its income to its shareholders.

Additionally, Sabaf has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that the performance shown by Sabaf can be open to many interpretations. Although the company has shown a fair bit of growth in earnings, the reinvestment rate is low. Meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits and reinvesting that at a higher rate of return. Up till now, we’ve only made a short study of the company’s growth data. To gain further insights into Sabaf’s past profit growth, check out this visualization of past earnings, revenue and cash flows.

If you spot an error that warrants correction, please contact the editor at [email protected] 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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