Is Sanlorenzo S.p.A.’s (BIT:SL) Latest Stock Performance A Reflection Of Its Financial Health?

Sanlorenzo (BIT:SL) has had a great run on the share market with its stock up by a significant 5.3% over the last week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Sanlorenzo’s ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company’s success at turning shareholder investments into profits.

Check out the opportunities and risks within the XX Leisure industry.

How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Sanlorenzo is:

26% = €63m ÷ €240m (Based on the trailing twelve months to June 2022).

The ‘return’ is the yearly profit. One way to conceptualize this is that for each €1 of shareholders’ capital it has, the company made €0.26 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Sanlorenzo’s Earnings Growth And 26% ROE

Firstly, we acknowledge that Sanlorenzo has a significantly high ROE. Secondly, even when compared to the industry average of 20% the company’s ROE is quite impressive. So, the substantial 37% net income growth seen by Sanlorenzo over the past five years isn’t overly surprising.

As a next step, we compared Sanlorenzo’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 18%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Sanlorenzo’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Sanlorenzo Using Its Retained Earnings Effectively?

The three-year median payout ratio for Sanlorenzo is 30%, which is moderately low. The company is retaining the remaining 70%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Sanlorenzo is reinvesting its earnings efficiently.

While Sanlorenzo has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to rise to 40% over the next three years. However, the company’s ROE is not expected to change by much despite the higher expected payout ratio.

Conclusion

In total, we are pretty happy with Sanlorenzo’s performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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