Has INFICON Holding AG's (VTX:IFCN) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

INFICON Holding's (VTX:IFCN) stock is up by a considerable 24% 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. In this article, we decided to focus on INFICON Holding's ROE.

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 INFICON Holding

How Is ROE Calculated?

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 INFICON Holding is:

22% = US$49m ÷ US$223m (Based on the trailing twelve months to December 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 CHF0.22 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.

INFICON Holding's Earnings Growth And 22% ROE

First thing first, we like that INFICON Holding has an impressive ROE. Secondly, even when compared to the industry average of 12% the company's ROE is quite impressive. Probably as a result of this, INFICON Holding was able to see a decent net income growth of 7.5% over the last five years.

Next, on comparing with the industry net income growth, we found that INFICON Holding's reported growth was lower than the industry growth of 9.9% in the same period, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 INFICON Holding's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is INFICON Holding Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 86% (or a retention ratio of 14%) for INFICON Holding suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, INFICON Holding has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 84% of its profits over the next three years. Regardless, the future ROE for INFICON Holding is predicted to rise to 29% despite there being not much change expected in its payout ratio.

Summary

Overall, we feel that INFICON Holding certainly does have some positive factors to consider. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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. 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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