Compagnie Financière Richemont SA (VTX:CFR) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

With its stock down 1.6% over the past month, it is easy to disregard Compagnie Financière Richemont (VTX:CFR). 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. In this article, we decided to focus on Compagnie Financière Richemont's ROE.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Compagnie Financière Richemont

How Is ROE Calculated?

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 Compagnie Financière Richemont is:

21% = €3.9b ÷ €19b (Based on the trailing twelve months to March 2023).

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 CHF0.21.

Why Is ROE Important For Earnings Growth?

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

Compagnie Financière Richemont's Earnings Growth And 21% ROE

To begin with, Compagnie Financière Richemont has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 14% the company's ROE is quite impressive. Probably as a result of this, Compagnie Financière Richemont was able to see a decent net income growth of 13% over the last five years.

Next, on comparing Compagnie Financière Richemont's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 14% in the same period.

Earnings growth is a huge factor in stock valuation. 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 Compagnie Financière Richemont fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Compagnie Financière Richemont Using Its Retained Earnings Effectively?

While Compagnie Financière Richemont has a three-year median payout ratio of 52% (which means it retains 48% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Additionally, Compagnie Financière Richemont 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 48%. Accordingly, forecasts suggest that Compagnie Financière Richemont's future ROE will be 21% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with Compagnie Financière Richemont's performance. 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.