LEM Holding’s (VTX:LEHN) stock is up by a considerable 11% over the past week. 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. In this article, we decided to focus on LEM Holding’s ROE.
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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for LEM Holding
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 LEM Holding is:
55% = CHF84m ÷ CHF153m (Based on the trailing twelve months to September 2023).
The ‘return’ is the yearly profit. That means that for every CHF1 worth of shareholders’ equity, the company generated CHF0.55 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. 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.
LEM Holding’s Earnings Growth And 55% ROE
To begin with, LEM Holding has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 14% the company’s ROE is quite impressive. This likely paved the way for the modest 9.3% net income growth seen by LEM Holding over the past five years.
We then performed a comparison between LEM Holding’s net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 10% in the same 5-year period.
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. What is LEHN worth today? The intrinsic value infographic in our free research report helps visualize whether LEHN is currently mispriced by the market.
Is LEM Holding Using Its Retained Earnings Effectively?
While LEM Holding has a three-year median payout ratio of 79% (which means it retains 21% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn’t hampered its ability to grow.
Moreover, LEM Holding is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. 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 74%. However, LEM Holding’s future ROE is expected to decline to 41% despite there being not much change anticipated in the company’s payout ratio.
Conclusion
In total, we are pretty happy with LEM Holding’s performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that’s probably a good sign. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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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