December 4, 2021

Earn Money

Business Life

Could Fundamentals Be Driving The Stock?

Most readers would already know that PaperpackE.E’s (ATH:PPAK) stock increased by 8.3% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company’s key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on PaperpackE.E’s ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

Check out our latest analysis for PaperpackE.E

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for PaperpackE.E is:

29% = €2.0m ÷ €6.6m (Based on the trailing twelve months to December 2019).

The ‘return’ is the profit over the last twelve months. So, this means that for every €1 of its shareholder’s investments, the company generates a profit of €0.29.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.

A Side By Side comparison of PaperpackE.E’s Earnings Growth And 29% ROE

To begin with, PaperpackE.E has a pretty high ROE which is interesting. Additionally, the company’s ROE is higher compared to the industry average of 9.9% which is quite remarkable. However, we are curious as to how the high returns still resulted in a flat growth for PaperpackE.E in the past five years. We reckon that there could be some other factors at play here that’s limiting the company’s growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

Next, on comparing with the industry net income growth, we found that PaperpackE.E’s reported growth was lower than the industry growth of 12% in the same period, which is not something we like to see.

ATSE:PPAK Past Earnings Growth April 20th 2020

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about PaperpackE.E’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is PaperpackE.E Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 35% (implying that the company keeps 65% of its income) over the last three years, PaperpackE.E has seen a negligible amount of growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, PaperpackE.E has paid dividends over a period of five years, which means that the company’s management is determined to pay dividends even if it means little to no earnings growth.

Summary

On the whole, we do feel that PaperpackE.E has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that’s preventing growth.

So far, we’ve only made a quick discussion around the company’s earnings growth. To gain further insights into PaperpackE.E’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.

Source Article