Declining Stock and Solid Fundamentals: Is The Market Wrong About Chocoladefabriken Lindt & Sprüngli AG (VTX:LISN)?

Chocoladefabriken Lindt & Sprüngli (VTX:LISN) has had a rough three months with its share price down 8.8%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Chocoladefabriken Lindt & Sprüngli'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Chocoladefabriken Lindt & Sprüngli

How Do You Calculate Return On Equity?

ROE 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:

16% = CHF685m ÷ CHF4.3b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CHF1 of its shareholder's investments, the company generates a profit of CHF0.16.

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. 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.

Chocoladefabriken Lindt & Sprüngli's Earnings Growth And 16% ROE

At first glance, Chocoladefabriken Lindt & Sprüngli seems to have a decent ROE. Even when compared to the industry average of 15% the company's ROE looks quite decent. Consequently, this likely laid the ground for the decent growth of 10% seen over the past five years by Chocoladefabriken Lindt & Sprüngli.

Next, on comparing with the industry net income growth, we found that Chocoladefabriken Lindt & Sprüngli's growth is quite high when compared to the industry average growth of 2.0% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is LISN worth today? The intrinsic value infographic in our free research report helps visualize whether LISN is currently mispriced by the market.

Is Chocoladefabriken Lindt & Sprüngli Making Efficient Use Of Its Profits?

Chocoladefabriken Lindt & Sprüngli has a significant three-year median payout ratio of 52%, meaning that it is left with only 48% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Additionally, Chocoladefabriken Lindt & Sprüngli 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 52%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 15%.

Summary

On the whole, we feel that Chocoladefabriken Lindt & Sprüngli's performance has been quite good. 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.