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The link between Saputo's finances and share price dynamics is murky

techsm5

Saputo (TSE:SAP) stock is up 13% over the past three months. However, we decided to pay attention to the fundamentals of the company which do not seem to give a clear indication of the financial health of the company. Specifically, we’ll be paying attention to Saputo’s ROE today.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

Check out our latest analysis for Saputo

How to calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

Thus, according to the above formula, Saputo’s ROE is:

5.9% = C$407 million ÷ C$6.9 billion (based on trailing 12 months to September 2022).

“Yield” refers to a company’s earnings over the past year. Another way to think about this is that for every CA$1 of equity, the company was able to make a profit of CA$0.06.

What is the relationship between ROE and earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

Side-by-side comparison of Saputo’s 5.9% earnings growth and ROE

At first glance, Saputo’s ROE does not look very promising. Then, compared to the industry average ROE of 8.0%, the company’s ROE leaves us even less excited. Under the circumstances, the significant drop in net income of 17% observed by Saputo over the past five years is not surprising. However, there could also be other factors leading to lower income. For example, the company has a very high payout rate or faces competitive pressures.

That being said, we benchmarked Saputo’s performance against that of the industry and were alarmed when we saw that although the company reduced profits, the industry increased profits at a rate of 12%. during the same period.

past earnings-growth
TSX: SAP prior earnings growth January 8, 2023

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. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. 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. Thus, you may want to check whether Saputo is trading on a high P/E or on a low P/E, relative to its industry.

Does Saputo effectively reinvest its profits?

Despite a three-year normal median payout rate of 47% (ie, a retention rate of 53%), the fact that Saputo’s earnings have declined is quite puzzling. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.

Additionally, Saputo has paid dividends over a period of at least ten years, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of business growth. . After reviewing the latest analyst consensus data, we found that the company’s future payout ratio is expected to drop to 37% over the next three years. The fact that the company’s ROE is expected to be 13% over the same period is explained by the drop in the payout ratio.

Conclusion

Overall, we believe that Saputo’s performance can lend itself to several interpretations. Although the company has a high earnings retention rate, its low rate of return is likely hampering its earnings growth. That being the case, the latest forecasts from industry analysts show that analysts are expecting a huge improvement in the company’s earnings growth rate. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

Valuation is complex, but we help make it simple.

Find out if Saputo 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

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.

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