Is LEM Holding SA's (VTX:LEHN) Latest Stock Performance A Reflection Of Its Financial Health?

LEM Holding's (VTX:LEHN) stock is up by a considerable 6.0% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on LEM Holding's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for LEM 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 LEM Holding is:

55% = CHF84m ÷ CHF153m (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. So, this means that for every CHF1 of its shareholder's investments, the company generates a profit of CHF0.55.

What Is The Relationship Between ROE And Earnings Growth?

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

A Side By Side comparison of LEM Holding's Earnings Growth And 55% ROE

Firstly, we acknowledge that LEM Holding has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 14% also doesn't go unnoticed by us. This probably laid the groundwork for LEM Holding's moderate 9.3% net income growth seen over the past five years.

Next, on comparing LEM Holding's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 10% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about LEM Holding's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is LEM Holding Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 79% (or a retention ratio of 21%) for LEM Holding suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, LEM Holding is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 76% of its profits over the next three years. However, LEM Holding's future ROE is expected to decline to 40% despite there being not much change anticipated in the company's payout ratio.

Conclusion

Overall, we are quite pleased with LEM Holding's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.