Does The Market Have A Low Tolerance For SIG Group AG's (VTX:SIGN) Mixed Fundamentals?

With its stock down 11% over the past three months, it is easy to disregard SIG Group (VTX:SIGN). It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Specifically, we decided to study SIG Group'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 SIG Group

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 SIG Group is:

7.9% = €243m ÷ €3.1b (Based on the trailing twelve months to December 2023).

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 CHF0.08.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

SIG Group's Earnings Growth And 7.9% ROE

When you first look at it, SIG Group's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.2%. Looking at SIG Group's exceptional 28% five-year net income growth in particular, we are definitely impressed. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that SIG Group's growth is quite high when compared to the industry average growth of 17% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is SIGN worth today? The intrinsic value infographic in our free research report helps visualize whether SIGN is currently mispriced by the market.

Is SIG Group Using Its Retained Earnings Effectively?

SIG Group's very high three-year median payout ratio of 101% suggests that the company is paying more to its shareholders than what it is earning. However, this hasn't hampered its ability to grow as we saw earlier. With that said, it could be worth keeping an eye on the high payout ratio as that's a huge risk. You can see the 2 risks we have identified for SIG Group by visiting our risks dashboard for free on our platform here.

Additionally, SIG Group has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 54% over the next three years. The fact that the company's ROE is expected to rise to 12% over the same period is explained by the drop in the payout ratio.

Conclusion

On the whole, we feel that the performance shown by SIG Group can be open to many interpretations. While no doubt its earnings growth is pretty substantial, its ROE and earnings retention is quite poor. So while the company has managed to grow its earnings in spite of this, we are unconvinced if this growth could extend, especially during troubled times. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com