The Flour Mills Group (VTX: GMI) had a good run on the stock market with its share up significantly by 12% over the past week. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . In particular, we will pay particular attention to the ROE of the Flour Mills Group today.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
Consult our latest analysis for the Flour Mills Group
How to calculate return on equity?
the formula for ROE is:
Return on equity = Net income (from continuing operations) Equity
Thus, according to the above formula, the ROE of the Flour Mills Group is:
5.8% = CHF 6.0 million ÷ CHF 104 million (based on the last twelve months up to December 2020).
The “return” is the profit of the last twelve months. One way to conceptualize this is that for every CHF1 of share capital it has, the company has made a profit of CHF 0.06.
What does ROE have to do with profit growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
A side-by-side comparison of the Flour Mills Group’s profit growth and ROE of 5.8%
At first glance, the ROE of the Flour Mills Group does not seem very promising. Then, compared to the industry average ROE of 13%, the company’s ROE leaves us even less enthusiastic. Thus, the stagnation of the profits of the Flour Mills Group over the last five years can possibly be explained by the low ROE among other factors.
As a next step, we compared the net income growth of the Flour Mills Group with the industry and found that the company has a similar growth figure compared to the industry average growth rate of 2.1% over the course of the same period.
Profit growth is a huge factor in the valuation of stocks. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or worrisome. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check whether Groupe Minoteries is trading at a high P / E or a low P / E, relative to its industry.
Does the Flour Mills Group efficiently use its retained earnings?
Despite a normal three-year median payout rate of 42% (or a retention rate of 58%), Groupe Minoteries has not experienced strong profit growth. So there could be other factors at play here that could potentially hamper growth. For example, the company faced headwinds.
In addition, the Flour Mills Group has paid dividends over a period of at least ten years, which suggests that sustaining dividend payments is much more important to management, even if it comes at the expense of the growth of the company. ‘business.
Overall, we believe that Groupe Minoteries certainly has some positive factors to consider. Namely, her respectable earnings growth, which she achieved by keeping most of her profits. However, given the low ROE, investors may not benefit from all of this reinvestment after all. So far, we have only had a brief discussion about the company’s profit growth. You can do your own research on Groupe Flour Mills and see how it has worked in the past by viewing this FREE detailed graphic past earnings, income and cash flow.
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