Grenobloise d'Electronique et d'Automatismes Société Anonyme's (EPA:GEA) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?

Grenobloise d'Electronique et d'Automatismes Société Anonyme's (EPA:GEA) stock is up by a considerable 13% over the past week. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study Grenobloise d'Electronique et d'Automatismes Société Anonyme's ROE in this article.

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.

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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 Grenobloise d'Electronique et d'Automatismes Société Anonyme is:

5.7% = €3.1m ÷ €54m (Based on the trailing twelve months to March 2025).

The 'return' is the profit over the last twelve months. That means that for every €1 worth of shareholders' equity, the company generated €0.06 in profit.

View our latest analysis for Grenobloise d'Electronique et d'Automatismes Société Anonyme

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Grenobloise d'Electronique et d'Automatismes Société Anonyme's Earnings Growth And 5.7% ROE

When you first look at it, Grenobloise d'Electronique et d'Automatismes Société Anonyme's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 4.8%, so we won't completely dismiss the company. However, Grenobloise d'Electronique et d'Automatismes Société Anonyme has seen a flattish net income growth over the past five years, which is not saying much. Bear in mind, the company's ROE is not very high. Hence, this provides some context to the flat earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 4.2% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Grenobloise d'Electronique et d'Automatismes Société Anonyme's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Grenobloise d'Electronique et d'Automatismes Société Anonyme Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 64% (meaning, the company retains only 36% of profits) for Grenobloise d'Electronique et d'Automatismes Société Anonyme suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

In addition, Grenobloise d'Electronique et d'Automatismes Société Anonyme has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

Overall, we would be extremely cautious before making any decision on Grenobloise d'Electronique et d'Automatismes Société Anonyme. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Grenobloise d'Electronique et d'Automatismes Société Anonyme and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.