Do Its Financials Have Any Role To Play In Driving Carlo Gavazzi Holding AG's (VTX:GAV) Stock Up Recently?

Carlo Gavazzi Holding's (VTX:GAV) stock is up by a considerable 15% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Carlo Gavazzi 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

We've discovered 2 warning signs about Carlo Gavazzi Holding. View them for free.

How Do You 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 Carlo Gavazzi Holding is:

6.1% = CHF8.0m ÷ CHF130m (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CHF1 worth of equity, the company was able to earn CHF0.06 in profit.

Check out our latest analysis for Carlo Gavazzi Holding

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Carlo Gavazzi Holding's Earnings Growth And 6.1% ROE

When you first look at it, Carlo Gavazzi Holding's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 13% either. However, the moderate 18% net income growth seen by Carlo Gavazzi Holding over the past five years is definitely a positive. So, the growth in the company's earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.

We then performed a comparison between Carlo Gavazzi Holding's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 18% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Carlo Gavazzi Holding fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Carlo Gavazzi Holding Using Its Retained Earnings Effectively?

Carlo Gavazzi Holding has a three-year median payout ratio of 37%, which implies that it retains the remaining 63% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Additionally, Carlo Gavazzi Holding 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 38% of its profits over the next three years. Still, forecasts suggest that Carlo Gavazzi Holding's future ROE will rise to 9.6% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, we do feel that Carlo Gavazzi Holding has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 2 risks we have identified for Carlo Gavazzi Holding.

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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.