Will the weakness in Stemmer Imaging AG (ETR:S9I) shares prove temporary given the strong fundamentals?
With its stock down 12% over the past week, it’s easy to overlook Stemmer Imaging (ETR:S9I). But if you pay close attention, you might realize that its strong financials could mean the stock could potentially see a long-term rise in value, as the markets generally reward companies in good financial health. In particular, we’ll be paying attention to Stemmer Imaging’s ROE today.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
See our latest analysis for Stemmer Imaging
How to calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Stemmer Imaging is:
18% = €13m ÷ €73m (based on the last twelve months until June 2022).
“Yield” refers to a company’s earnings over the past year. One way to conceptualize this is that for every euro of share capital it has, the company has made a profit of 0.18 euro.
Why is ROE important for earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
Profit growth and ROE of 18% from Stemmer Imaging
For starters, Stemmer Imaging seems to have a respectable ROE. Additionally, the company’s ROE compares quite favorably to the industry average of 9.2%. Probably because of this, Stemmer Imaging has been able to see a decent 16% growth over the past five years.
We then compared Stemmer Imaging’s net income growth with the industry and we are happy to see that the growth figure for the company is higher compared to the industry which has a growth rate of 4.9 % over the same period.
Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. Is Stemmer Imaging correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Does Stemmer Imaging effectively reinvest its profits?
With a three-year median payout ratio of 41% (implying the company retains 59% of its earnings), it appears that Stemmer Imaging is effectively reinvesting to see respectable earnings growth and paying out a well-covered dividend. .
Additionally, Stemmer Imaging is committed to continuing to share its earnings with shareholders, which we infer from its long four-year history of paying dividends. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to remain stable at 38%. As a result, forecasts suggest that Stemmer Imaging’s future ROE will be 15%, which is again similar to today’s ROE.
Overall, we’re pretty happy with Stemmer Imaging’s performance. In particular, it is good to see that the company is investing heavily in its business and, along with a high rate of return, this has resulted in significant growth in its profits. That said, the latest forecasts from industry analysts show that the company’s earnings growth is expected to slow. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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