Yahoo Finance Compagnie Financière Richemont SA's (VTX:CFR) Has Had A Decent Run On The Stock market: Are Fundamentals In The Driver's Seat?
Compagnie Financière Richemont's (VTX:CFR) stock up by 3.2% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Compagnie Financière Richemont's ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Compagnie Financière Richemont
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 Compagnie Financière Richemont is:
15% = €2.7b ÷ €18b (Based on the trailing twelve months to September 2022).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every CHF1 worth of equity, the company was able to earn CHF0.15 in profit.
Why Is ROE Important For 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 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.
Compagnie Financière Richemont's Earnings Growth And 15% ROE
To begin with, Compagnie Financière Richemont seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 15%. Despite the modest returns, Compagnie Financière Richemont's five year net income growth was quite low, averaging at only 4.4%. We reckon that a low growth, when returns are moderate could be the result of certain circumstances like low earnings retention or poor allocation of capital.
As a next step, we compared Compagnie Financière Richemont's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 14% in the same 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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Compagnie Financière Richemont's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Compagnie Financière Richemont Using Its Retained Earnings Effectively?
With a high three-year median payout ratio of 60% (or a retention ratio of 40%), most of Compagnie Financière Richemont's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.
Additionally, Compagnie Financière Richemont 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. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 46% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 20%, over the same period.
Summary
On the whole, we do feel that Compagnie Financière Richemont has some positive attributes. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.
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