Are Thales SA (EPA: HO) fundamentals good enough to justify buying given recent stock weakness?

Thales (EPA: HO) had a difficult three-month period with a stock price down 11%. However, stock prices are usually determined by a company’s long-term financials, which in this case looks pretty respectable. Concretely, we decided to study the ROE of Thales in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.

See our latest analysis for Thales

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 above formula, Thales’s ROE is:

15% = 898 million euros ÷ 5.9 billion euros (based on the last twelve months up to June 2021).

The “return” is the annual profit. Another way to look at this is that for every $ 1 in shares, the company was able to make $ 0.15 in profit.

What does ROE have to do with profit growth?

So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of those profits the company reinvests or “withholds” and its efficiency, 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.

Growth in Thales profits and 15% ROE

A priori, Thales’s ROE seems acceptable. Even compared to the industry average of 13%, the company’s ROE looks pretty decent. As might be expected, the 3.8% drop in net income announced by Thales is a bit surprising. We believe there might be other factors at play here that are preventing the growth of the business. These include low profit retention or poor capital allocation.

In a next step, we compared the performance of Thales with that of the industry and found that the industry declined at a rate of 11% during the same period, which means that the company reduced its profits. at a slower pace than the industry. This offers some relief to shareholders

ENXTPA: HO Growth in past profits on December 22, 2021

The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. If you are wondering about the valuation of Thales, take a look at this gauge of its price / earnings ratio, compared to its industry.

Is Thales effectively reinvesting its profits?

Despite a normal three-year median payout rate of 43% (i.e. a retention rate of 57%), the fact that Thales profits have declined is quite surprising. It seems that there could be other reasons for the lack in this regard. For example, the business could be in decline.

Additionally, Thales 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 growing the business. . Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 40%. In any case, Thales’s future ROE should reach 23% despite the little change expected in its payout ratio.

Conclusion

Overall, we think Thales certainly has some positive factors to consider. However, given the high ROE and high profit retention, we would expect the company to show strong profit growth, but this is not the case here. This suggests that there could be an external threat to the business, hampering its growth. That said, looking at current analysts’ estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.


Source link

Comments are closed.