Could S.P.E.E.H. Hidroelectrica S.A.'s (BVB:H2O) Weak Financials Mean That The Market Could Correct Its Share Price?

Most readers would already know that S.P.E.E.H. Hidroelectrica's (BVB:H2O) stock increased by 2.1% over the past three months. However, in this article, we decided to focus on its weak financials, as long-term fundamentals ultimately dictate market outcomes. Specifically, we decided to study S.P.E.E.H. Hidroelectrica's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for S.P.E.E.H. Hidroelectrica is:

14% = RON2.9b ÷ RON21b (Based on the trailing twelve months to September 2025).

The 'return' is the yearly profit. So, this means that for every RON1 of its shareholder's investments, the company generates a profit of RON0.14.

See our latest analysis for S.P.E.E.H. Hidroelectrica

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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of S.P.E.E.H. Hidroelectrica's Earnings Growth And 14% ROE

When you first look at it, S.P.E.E.H. Hidroelectrica's ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 10.0% doesn't go unnoticed by us. However, S.P.E.E.H. Hidroelectrica's five year net income growth was quite low averaging at only 4.2%. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the low earnings growth.

We then compared S.P.E.E.H. Hidroelectrica's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 18% in the same 5-year period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is H2O fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is S.P.E.E.H. Hidroelectrica Making Efficient Use Of Its Profits?

S.P.E.E.H. Hidroelectrica has a very high three-year median payout ratio of 102%, which suggests that the company is dipping into more than just its profits to pay its dividend and that shows in its low earnings growth number. That's a huge risk in our books.

Additionally, S.P.E.E.H. Hidroelectrica started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 99%. Regardless, the future ROE for S.P.E.E.H. Hidroelectrica is predicted to rise to 19% despite there being not much change expected in its payout ratio.

Summary

In total, we would have a hard think before deciding on any investment action concerning S.P.E.E.H. Hidroelectrica. While its ROE is pretty moderate, the company is retaining very little of its profits, meaning very little of its profits are being reinvested into the business. This explains the lack or absence of growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.