Forbo Holding AG's (VTX:FORN) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 9.9% over the past month, it is easy to disregard Forbo Holding (VTX:FORN). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Forbo Holding's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How To 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 Forbo Holding is:

15% = CHF95m ÷ CHF626m (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. That means that for every CHF1 worth of shareholders' equity, the company generated CHF0.15 in profit.

Check out our latest analysis for Forbo Holding

What Has ROE Got To Do With 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Forbo Holding's Earnings Growth And 15% ROE

To begin with, Forbo Holding seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 14%. As you might expect, the 6.3% net income decline reported by Forbo Holding is a bit of a surprise. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. These include low earnings retention or poor allocation of capital.

With the industry earnings declining at a rate of 6.5% in the same period, we deduce that both the company and the industry are shrinking at the same rate.

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 FORN? You can find out in our latest intrinsic value infographic research report.

Is Forbo Holding Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 33% (where it is retaining 67% of its profits), Forbo Holding has seen a decline in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, Forbo Holding has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 34% of its profits over the next three years. Accordingly, forecasts suggest that Forbo Holding's future ROE will be 15% which is again, similar to the current ROE.

Conclusion

On the whole, we do feel that Forbo Holding has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.