Yahoo Finance Declining Stock and Solid Fundamentals: Is The Market Wrong About Siemens Healthineers AG (ETR:SHL)?
It is hard to get excited after looking at Siemens Healthineers' (ETR:SHL) recent performance, when its stock has declined 5.2% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Siemens Healthineers' ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. 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 Siemens Healthineers
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 Siemens Healthineers is:
10% = €1.9b ÷ €18b (Based on the trailing twelve months to June 2024).
The 'return' is the yearly profit. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.10.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
A Side By Side comparison of Siemens Healthineers' Earnings Growth And 10% ROE
At first glance, Siemens Healthineers seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 9.6%. Siemens Healthineers' decent returns aren't reflected in Siemens Healthineers'mediocre five year net income growth average of 3.5%. We reckon that a low growth, when returns are moderate could be the result of certain circumstances like low earnings retention or poor allocation of capital.
When you consider the fact that the industry earnings have shrunk at a rate of 1.1% in the same 5-year period, the company's net income growth is pretty remarkable.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Siemens Healthineers fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Siemens Healthineers Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 54% (that is, the company retains only 46% of its income) over the past three years for Siemens Healthineers suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.
Additionally, Siemens Healthineers has paid dividends over a period of six years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 49% of its profits over the next three years. Regardless, the future ROE for Siemens Healthineers is predicted to rise to 14% despite there being not much change expected in its payout ratio.
Conclusion
On the whole, we feel that Siemens Healthineers' performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.
