Rémy Cointreau (EPA:RCO) had a difficult month with its share price down 11%. But if you pay close attention, you might realize that its strong financials could mean the stock could potentially see a long-term rise in value, as the markets generally reward companies in good financial shape. In concrete terms, we have chosen to study Rémy Cointreau’s ROE in this article.
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 simpler terms, it measures a company’s profitability relative to equity.
Our analysis indicates that The RCO is potentially undervalued!
How do you calculate return on equity?
The ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, according to the formula above, the ROE of Rémy Cointreau is:
13% = €212M ÷ €1.7B (based on the last twelve months until March 2022).
The “return” is the annual profit. This means that for every €1 of equity, the company generated €0.13 of profit.
What is the relationship between ROE and 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.
A side-by-side comparison of Remy Cointreau’s 13% earnings and ROE growth
For starters, Rémy Cointreau seems to have a respectable ROE. Additionally, the company’s ROE compares quite favorably to the industry average of 8.0%. Probably thanks to this, Rémy Cointreau was able to register a decent growth of 6.4% over the past five years.
Next, we compared Rémy Cointreau’s net income growth with that of the sector and found that the company posted a similar growth figure compared to the sector’s average growth rate of 6.4% over the same period.
Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. What is RCO worth today? The intrinsic value infographic in our free research report helps visualize if the RCO is currently being mispriced by the market.
Does Rémy Cointreau make effective use of its retained earnings?
While Rémy Cointreau has a three-year median payout ratio of 52% (meaning it retains 48% of earnings), the company has still seen good earnings growth in the past, meaning that its high payout rate has not hindered its ability to grow.
Moreover, Remy Cointreau has paid dividends over a period of at least ten years, which means that the company is quite serious about sharing its profits with shareholders. Our latest analyst data shows that the company’s future payout ratio is expected to drop to 31% over the next three years. Thus, the expected drop in Rémy Cointreau’s distribution rate explains the anticipated rise in the company’s future ROE to 17% over the same period.
Overall, we are quite satisfied with Rémy Cointreau’s performance. 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, looking at current analyst estimates, we found that the company’s earnings are expected to accelerate. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.
Valuation is complex, but we help make it simple.
Find out if Remy Cointreau is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
See the free analysis