Will Weakness in Andritz AG's (VIE:ANDR) Stock Prove Temporary Given Strong Fundamentals?

Andritz (VIE:ANDR) has had a rough three months with its share price down 20%. 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 Andritz's ROE in this article.

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.

See our latest analysis for Andritz

How Do You Calculate Return On Equity?

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 Andritz is:

23% = €500m ÷ €2.2b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every €1 worth of shareholders' equity, the company generated €0.23 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Andritz's Earnings Growth And 23% ROE

Firstly, we acknowledge that Andritz has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 10% also doesn't go unnoticed by us. Under the circumstances, Andritz's considerable five year net income growth of 27% was to be expected.

Next, on comparing with the industry net income growth, we found that Andritz's growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Andritz is trading on a high P/E or a low P/E, relative to its industry.

Is Andritz Using Its Retained Earnings Effectively?

The three-year median payout ratio for Andritz is 49%, which is moderately low. The company is retaining the remaining 51%. By the looks of it, the dividend is well covered and Andritz is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Andritz 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 54% of its profits over the next three years. Regardless, Andritz's ROE is speculated to decline to 18% despite there being no anticipated change in its payout ratio.

Summary

In total, we are pretty happy with Andritz's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.