Is EMS-CHEMIE HOLDING AG's (VTX:EMSN) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

EMS-CHEMIE HOLDING (VTX:EMSN) has had a great run on the share market with its stock up by a significant 11% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study EMS-CHEMIE HOLDING's ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for EMS-CHEMIE HOLDING

How To 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 EMS-CHEMIE HOLDING is:

26% = CHF461m ÷ CHF1.8b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each CHF1 of shareholders' capital it has, the company made CHF0.26 in profit.

Why Is ROE Important For 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.

EMS-CHEMIE HOLDING's Earnings Growth And 26% ROE

Firstly, we acknowledge that EMS-CHEMIE HOLDING has a significantly high ROE. Secondly, even when compared to the industry average of 18% the company's ROE is quite impressive. However, we are curious as to how the high returns still resulted in a flat growth for EMS-CHEMIE HOLDING 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

We then compared EMS-CHEMIE HOLDING's net income growth with the industry and found that the company's growth figure is a bit less than the average industry growth rate of 0.2% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about EMS-CHEMIE HOLDING's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is EMS-CHEMIE HOLDING Using Its Retained Earnings Effectively?

EMS-CHEMIE HOLDING has a high three-year median payout ratio of 70% (or a retention ratio of 30%), 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.

In addition, EMS-CHEMIE HOLDING has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 88% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Conclusion

On the whole, we do feel that EMS-CHEMIE HOLDING has some positive attributes. 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. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.