Chocoladefabriken Lindt & Sprüngli AG's (VTX:LISN) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?
Chocoladefabriken Lindt & Sprüngli's (VTX:LISN) stock is up by a considerable 10% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Chocoladefabriken Lindt & Sprüngli'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Chocoladefabriken Lindt & Sprüngli
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 Chocoladefabriken Lindt & Sprüngli is:
13% = CHF570m ÷ CHF4.4b (Based on the trailing twelve months to December 2022).
The 'return' is the profit 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 CHF0.13 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.
A Side By Side comparison of Chocoladefabriken Lindt & Sprüngli's Earnings Growth And 13% ROE
At first glance, Chocoladefabriken Lindt & Sprüngli seems to have a decent ROE. Even when compared to the industry average of 13% the company's ROE looks quite decent. However, we are curious as to how Chocoladefabriken Lindt & Sprüngli's decent returns still resulted in flat growth for Chocoladefabriken Lindt & Sprüngli in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. These include low earnings retention or poor allocation of capital.
As a next step, we compared Chocoladefabriken Lindt & Sprüngli's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 4.0% in the same period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Chocoladefabriken Lindt & Sprüngli fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Chocoladefabriken Lindt & Sprüngli Making Efficient Use Of Its Profits?
Chocoladefabriken Lindt & Sprüngli has a high three-year median payout ratio of 56% (or a retention ratio of 44%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.
Moreover, Chocoladefabriken Lindt & Sprüngli 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 52% of its profits over the next three years. Regardless, the future ROE for Chocoladefabriken Lindt & Sprüngli is predicted to rise to 16% despite there being not much change expected in its payout ratio.
Overall, we feel that Chocoladefabriken Lindt & Sprüngli certainly does have some positive factors to consider. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.
Chocoladefabriken Lindt & Sprüngli
Chocoladefabriken Lindt & Sprüngli AG, together with its subsidiaries, engages in the manufacture and sale of chocolate products worldwide.
Flawless balance sheet with solid track record.