Yahoo Finance Geberit AG's (VTX:GEBN) Recent Stock Performance Looks Decent- Can Strong Fundamentals Be the Reason?
Geberit's (VTX:GEBN) stock is up by 5.4% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Geberit's ROE today.
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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Geberit
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 Geberit is:
43% = CHF644m ÷ CHF1.5b (Based on the trailing twelve months to September 2022).
The 'return' refers to a company's earnings over the last year. So, this means that for every CHF1 of its shareholder's investments, the company generates a profit of CHF0.43.
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.
Geberit's Earnings Growth And 43% ROE
Firstly, we acknowledge that Geberit has a significantly high ROE. Secondly, even when compared to the industry average of 24% the company's ROE is quite impressive. This probably laid the groundwork for Geberit's moderate 6.4% net income growth seen over the past five years.
As a next step, we compared Geberit's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 6.6% in the same period.
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. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for GEBN? You can find out in our latest intrinsic value infographic research report.
Is Geberit Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 63% (or a retention ratio of 37%) for Geberit suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Additionally, Geberit has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. 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 63%. Accordingly, forecasts suggest that Geberit's future ROE will be 35% which is again, similar to the current ROE.
Conclusion
On the whole, we feel that Geberit's performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. 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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