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Declining Stock and Decent Financials: Is The Market Wrong About Chocoladefabriken Lindt & Sprüngli AG (VTX:LISN)?

Chocoladefabriken Lindt & Sprüngli (VTX:LISN) has had a rough three months with its share price down 10%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Chocoladefabriken Lindt & Sprüngli's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Chocoladefabriken Lindt & Sprüngli

How To Calculate Return On Equity?

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 Chocoladefabriken Lindt & Sprüngli is:

12% = CHF527m ÷ CHF4.4b (Based on the trailing twelve months to June 2022).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CHF1 of shareholders' capital it has, the company made CHF0.12 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Chocoladefabriken Lindt & Sprüngli's Earnings Growth And 12% ROE

To start with, Chocoladefabriken Lindt & Sprüngli's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 12%. However, we are curious as to how Chocoladefabriken Lindt & Sprüngli's decent returns still resulted in flat growth for Chocoladefabriken Lindt & Sprüngli in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

We then compared Chocoladefabriken Lindt & Sprüngli's net income growth with the industry and found that the average industry growth rate was 3.2% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Chocoladefabriken Lindt & Sprüngli is trading on a high P/E or a low P/E, relative to its industry.

Is Chocoladefabriken Lindt & Sprüngli Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 56% (meaning, the company retains only 44% of profits) for Chocoladefabriken Lindt & Sprüngli suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Moreover, Chocoladefabriken Lindt & Sprüngli has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer 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 51%. Accordingly, forecasts suggest that Chocoladefabriken Lindt & Sprüngli's future ROE will be 11% which is again, similar to the current ROE.

Conclusion

In total, it does look like Chocoladefabriken Lindt & Sprüngli has some positive aspects to its business. 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 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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