Yahoo Finance Is Pfeiffer Vacuum Technology AG's (ETR:PFV) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?
Pfeiffer Vacuum Technology (ETR:PFV) has had a great run on the share market with its stock up by a significant 32% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Pfeiffer Vacuum Technology's ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.
See our latest analysis for Pfeiffer Vacuum Technology
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 Pfeiffer Vacuum Technology is:
15% = €76m ÷ €524m (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 €1 worth of equity, the company was able to earn €0.15 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Pfeiffer Vacuum Technology's Earnings Growth And 15% ROE
At first glance, Pfeiffer Vacuum Technology seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 12%. However, we are curious as to how the high returns still resulted in flat growth for Pfeiffer Vacuum Technology 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 Pfeiffer Vacuum Technology's net income growth with the industry and discovered that the company's growth is slightly better than the industry which has shrunk at a rate of 1.9% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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. Is Pfeiffer Vacuum Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Pfeiffer Vacuum Technology Making Efficient Use Of Its Profits?
In spite of a normal three-year median payout ratio of 41% (or a retention ratio of 59%), Pfeiffer Vacuum Technology hasn't seen much growth in its earnings. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Additionally, Pfeiffer Vacuum Technology 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 44%. As a result, Pfeiffer Vacuum Technology's ROE is not expected to change by much either, which we inferred from the analyst estimate of 17% for future ROE.
Conclusion
In total, we are pretty happy with Pfeiffer Vacuum Technology's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.
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