Chocoladefabriken Lindt & Sprüngli AG's (VTX:LISN) Has Performed Well But Fundamentals Look Varied: Is There A Clear Direction For The Stock?

Chocoladefabriken Lindt & Sprüngli's (VTX:LISN) stock up by 2.1% over the past week. Given that the stock prices usually follow long-term business performance, we wonder if the company's mixed financials could have any adverse effect on its current price price movement Particularly, we will be paying attention to Chocoladefabriken Lindt & Sprüngli's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Chocoladefabriken Lindt & Sprüngli

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 Chocoladefabriken Lindt & Sprüngli is:

6.9% = CHF320m ÷ CHF4.6b (Based on the trailing twelve months to December 2020).

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 CHF0.07 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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 Chocoladefabriken Lindt & Sprüngli's Earnings Growth And 6.9% ROE

When you first look at it, Chocoladefabriken Lindt & Sprüngli's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 13%, the company's ROE leaves us feeling even less enthusiastic. As a result, Chocoladefabriken Lindt & Sprüngli reported a very low income growth of 2.1% over the past five years.

Next, on comparing with the industry net income growth, we found that Chocoladefabriken Lindt & Sprüngli's reported growth was lower than the industry growth of 2.8% in the same period, which is not something we like to see.

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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Chocoladefabriken Lindt & Sprüngli's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Chocoladefabriken Lindt & Sprüngli Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 49% (or a retention ratio of 51% over the past three years, Chocoladefabriken Lindt & Sprüngli has seen very little growth in earnings as we saw above. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Chocoladefabriken Lindt & Sprüngli has paid dividends over a period of at least ten 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 53% of its profits over the next three years. However, Chocoladefabriken Lindt & Sprüngli's ROE is predicted to rise to 9.8% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we have mixed feelings about Chocoladefabriken Lindt & Sprüngli. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.

If you decide to trade Chocoladefabriken Lindt & Sprüngli, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.