2G Energy (ETR:2GB) has had a great run on the share market with its stock up by a significant 14% over the last month. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. Specifically, we decided to study 2G Energy’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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for 2G Energy
How To Calculate Return On Equity?
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 2G Energy is:
15% = €16m ÷ €109m (Based on the trailing twelve months to December 2022).
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 €0.15 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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 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.
2G Energy’s Earnings Growth And 15% ROE
To start with, 2G Energy’s ROE looks acceptable. Further, the company’s ROE compares quite favorably to the industry average of 8.7%. This probably laid the ground for 2G Energy’s moderate 18% net income growth seen over the past five years.
Next, on comparing 2G Energy’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 21% in the same period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is 2GB fairly valued? This infographic on the company’s intrinsic value has everything you need to know.
Is 2G Energy Efficiently Re-investing Its Profits?
2G Energy has a low three-year median payout ratio of 18%, meaning that the company retains the remaining 82% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.
Additionally, 2G Energy 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. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 19% of its profits over the next three years. However, 2G Energy’s ROE is predicted to rise to 19% despite there being no anticipated change in its payout ratio.
Conclusion
In total, we are pretty happy with 2G Energy’s performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.
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