Yahoo Finance EMS-CHEMIE HOLDING AG's (VTX:EMSN) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?
It is hard to get excited after looking at EMS-CHEMIE HOLDING's (VTX:EMSN) recent performance, when its stock has declined 18% over the past three months. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to EMS-CHEMIE HOLDING's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 EMS-CHEMIE HOLDING
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for EMS-CHEMIE HOLDING is:
26% = CHF558m ÷ CHF2.1b (Based on the trailing twelve months to June 2022).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CHF1 of its shareholder's investments, the company generates a profit of CHF0.26.
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. 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.
EMS-CHEMIE HOLDING's Earnings Growth And 26% ROE
First thing first, we like that EMS-CHEMIE HOLDING has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 16% which is quite remarkable. Given the circumstances, we can't help but wonder why EMS-CHEMIE HOLDING saw little to no growth in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. These include low earnings retention or poor allocation of capital
As a next step, we compared EMS-CHEMIE HOLDING'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 2.8% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Has the market priced in the future outlook for EMSN? You can find out in our latest intrinsic value infographic research report.
Is EMS-CHEMIE HOLDING Using Its Retained Earnings Effectively?
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.
In addition, EMS-CHEMIE HOLDING has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 100% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.
Summary
On the whole, we do feel that EMS-CHEMIE HOLDING 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. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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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