Yahoo Finance Are Robust Financials Driving The Recent Rally In SÜSS MicroTec SE's (ETR:SMHN) Stock?
SÜSS MicroTec (ETR:SMHN) has had a great run on the share market with its stock up by a significant 46% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on SÜSS MicroTec's ROE.
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. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for SÜSS MicroTec
How Is ROE Calculated?
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 SÜSS MicroTec is:
10% = €25m ÷ €241m (Based on the trailing twelve months to March 2024).
The 'return' is the yearly profit. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.10 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
SÜSS MicroTec's Earnings Growth And 10% ROE
To start with, SÜSS MicroTec's ROE looks acceptable. Even so, when compared with the average industry ROE of 19%, we aren't very excited. That being the case, the significant five-year 48% net income growth reported by SÜSS MicroTec comes as a pleasant surprise. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place. Bear in mind, the company does have a respectable ROE. It is just that the industry ROE is higher. So this certainly also provides some context to the high earnings growth seen by the company.
As a next step, we compared SÜSS MicroTec's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 38%.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is SMHN worth today? The intrinsic value infographic in our free research report helps visualize whether SMHN is currently mispriced by the market.
Is SÜSS MicroTec Efficiently Re-investing Its Profits?
SÜSS MicroTec has a really low three-year median payout ratio of 19%, meaning that it has the remaining 81% left over to reinvest into its business. So it looks like SÜSS MicroTec is reinvesting profits heavily to grow its business, which shows in its earnings growth.
While SÜSS MicroTec has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 12% over the next three years. As a result, the expected drop in SÜSS MicroTec's payout ratio explains the anticipated rise in the company's future ROE to 15%, over the same period.
Summary
Overall, we are quite pleased with SÜSS MicroTec's performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.
