Helvetia Holding AG (VTX:HELN) On An Uptrend: Could Fundamentals Be Driving The Stock?

Helvetia Holding's (VTX:HELN) stock up by 6.7% 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. Specifically, we decided to study Helvetia Holding's ROE in this article.

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 Helvetia Holding

How To 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 Helvetia Holding is:

13% = CHF614m ÷ CHF4.7b (Based on the trailing twelve months to December 2022).

The 'return' is the yearly profit. That means that for every CHF1 worth of shareholders' equity, the company generated 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Helvetia Holding's Earnings Growth And 13% ROE

At first glance, Helvetia Holding seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 13%. Despite the moderate return on equity, Helvetia Holding has posted a net income growth of 3.9% over the past five years. So, there could be some other factors at play that could be impacting the company's growth. For instance, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

We then performed a comparison between Helvetia Holding's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 4.5% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is HELN fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Helvetia Holding Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 63% (or a retention ratio of 37%), most of Helvetia Holding's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Moreover, Helvetia Holding 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. 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 57%. However, Helvetia Holding's ROE is predicted to rise to 17% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we feel that Helvetia Holding certainly does have some positive factors to consider. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. 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.