Yahoo Finance EMS-CHEMIE HOLDING AG (VTX:EMSN) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?
EMS-CHEMIE HOLDING (VTX:EMSN) has had a rough month with its share price down 5.0%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to EMS-CHEMIE HOLDING's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for EMS-CHEMIE HOLDING
How Is ROE Calculated?
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 EMS-CHEMIE HOLDING is:
22% = CHF461m ÷ CHF2.1b (Based on the trailing twelve months to December 2023).
The 'return' is the yearly profit. That means that for every CHF1 worth of shareholders' equity, the company generated CHF0.22 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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 EMS-CHEMIE HOLDING's Earnings Growth And 22% ROE
First thing first, we like that EMS-CHEMIE HOLDING has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 11% also doesn't go unnoticed by us. Despite this, EMS-CHEMIE HOLDING's five year net income growth was quite flat over the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
We then compared EMS-CHEMIE HOLDING's net income growth with the industry and found that the average industry growth rate was 13% in the same 5-year period.
Earnings growth is an important metric to consider when valuing a stock. 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. Is EMSN fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is EMS-CHEMIE HOLDING Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 69% (meaning, the company retains only 31% of profits) for EMS-CHEMIE HOLDING suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.
Additionally, EMS-CHEMIE HOLDING has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 88% over the next three years. Still, forecasts suggest that EMS-CHEMIE HOLDING's future ROE will rise to 27% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.
Summary
In total, it does look like EMS-CHEMIE HOLDING has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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.
