Colruyt Group (EBR:COLR) has had a rough month with its share price down 8.5%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Colruyt Group’s ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
View our latest analysis for Colruyt Group
How Is ROE Calculated?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Colruyt Group is:
31% = €998m ÷ €3.2b (Based on the trailing twelve months to September 2023).
The ‘return’ is the income the business earned over the last year. So, this means that for every €1 of its shareholder’s investments, the company generates a profit of €0.31.
What Has ROE Got To Do With Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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.
A Side By Side comparison of Colruyt Group’s Earnings Growth And 31% ROE
Firstly, we acknowledge that Colruyt Group has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 13% also doesn’t go unnoticed by us. Despite this, Colruyt Group’s five year net income growth was quite low averaging at only 4.2%. This is interesting as the high returns should mean that the company has the ability to generate high growth but for some reason, it hasn’t been able to do so. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or or poor allocation of capital.
We then compared Colruyt Group’s net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 11% in the same 5-year period, which is a bit concerning.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is COLR worth today? The intrinsic value infographic in our free research report helps visualize whether COLR is currently mispriced by the market.
Is Colruyt Group Making Efficient Use Of Its Profits?
With a high three-year median payout ratio of 53% (or a retention ratio of 47%), most of Colruyt Group’s profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.
Moreover, Colruyt Group has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 50%. Regardless, Colruyt Group’s ROE is speculated to decline to 11% despite there being no anticipated change in its payout ratio.
Summary
Overall, we feel that Colruyt Group certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
Valuation is complex, but we’re helping make it simple.
Find out whether Colruyt Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
