Gaztransport & Technigaz (EPA:GTT) stock is up 12% over the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. We will be paying particular attention today to the ROE of Gaztransport & Technigaz.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest analysis for Gaztransport & Technigaz
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the formula above, the ROE of Gaztransport & Technigaz is:
48% = €121m ÷ €250m (based on the last twelve months to June 2022).
The “return” is the annual profit. This means that for every €1 of equity, the company generated €0.48 of profit.
What does ROE have to do with earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
Growth in Gaztransport & Technigaz results and 48% ROE
First of all, we appreciate that Gaztransport & Technigaz has an impressive ROE. Second, even compared to the industry average of 12%, the company’s ROE is quite impressive. This probably laid the foundations for the moderate 5.0% growth in Gaztransport & Technigaz’s net income observed over the past five years.
Given that the industry has been shrinking profits at a rate of 7.7% over the same period, the company’s net profit growth is quite impressive.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. If you are wondering about the valuation of Gaztransport & Technigaz, check out this indicator of its price/earnings ratio, compared to its sector of activity.
Does Gaztransport & Technigaz make effective use of its retained earnings?
Gaztransport & Technigaz has a significant three-year median payout rate of 80%, which means it only has 20% left to reinvest in its business. This implies that the company was able to achieve decent earnings growth despite returning most of its earnings to shareholders.
Additionally, Gaztransport & Technigaz has paid dividends over an eight-year period, which means the company is pretty serious about sharing its profits with shareholders. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to remain stable at 81%. Still, forecasts suggest Gaztransport & Technigaz’s future ROE will reach 69% even though the company’s payout ratio is not expected to change much.
All in all, we are quite satisfied with the performance of Gaztransport & Technigaz. In particular, its high ROE is quite remarkable and also the probable explanation for its considerable earnings growth. Yet the company retains a small portion of its profits. Which means the company was able to increase its profits despite this, so it’s not that bad. That said, the latest forecasts from industry analysts show that the company’s earnings are set to accelerate. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
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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.