Yahoo Finance Elmos Semiconductor SE's (ETR:ELG) Stock Is Going Strong: Is the Market Following Fundamentals?
Elmos Semiconductor's (ETR:ELG) stock is up by a considerable 28% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Elmos Semiconductor's ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Elmos Semiconductor
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 Elmos Semiconductor is:
22% = €99m ÷ €448m (Based on the trailing twelve months to December 2023).
The 'return' refers to a company's earnings over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.22 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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 Elmos Semiconductor's Earnings Growth And 22% ROE
First thing first, we like that Elmos Semiconductor has an impressive ROE. Even when compared to the industry average of 19% the company's ROE is pretty decent. As a result, Elmos Semiconductor's remarkable 37% net income growth seen over the past 5 years is likely aided by its high ROE.
Next, on comparing Elmos Semiconductor's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 36% over the last few years.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Elmos Semiconductor's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Elmos Semiconductor Using Its Retained Earnings Effectively?
Elmos Semiconductor's ' three-year median payout ratio is on the lower side at 21% implying that it is retaining a higher percentage (79%) of its profits. So it looks like Elmos Semiconductor is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Moreover, Elmos Semiconductor is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 19%. Still, forecasts suggest that Elmos Semiconductor's future ROE will drop to 17% even though the the company's payout ratio is not expected to change by much.
Conclusion
On the whole, we feel that Elmos Semiconductor's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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.
