CPH Chemie + Papier Holding (VTX:CPHN) has had a great run on the share market with its stock up by a significant 15% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study CPH Chemie + Papier Holding's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
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 CPH Chemie + Papier Holding is:
11% = CHF48m ÷ CHF454m (Based on the trailing twelve months to June 2020).
The 'return' is the income the business earned over the last year. That means that for every CHF1 worth of shareholders' equity, the company generated CHF0.11 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 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.
CPH Chemie + Papier Holding's Earnings Growth And 11% ROE
To start with, CPH Chemie + Papier Holding's ROE looks acceptable. On comparing with the average industry ROE of 7.9% the company's ROE looks pretty remarkable. This probably laid the ground for CPH Chemie + Papier Holding's significant 65% net income growth seen over the past five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared CPH Chemie + Papier Holding's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.9%.
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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about CPH Chemie + Papier Holding's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is CPH Chemie + Papier Holding Using Its Retained Earnings Effectively?
While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. This is likely what's driving the high earnings growth number discussed above.
Our latest analyst data shows that the future payout ratio of the company is expected to rise to 56% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 5.4%, over the same period.
Overall, we are quite pleased with CPH Chemie + Papier Holding's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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.
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