Can Mixed Fundamentals Have A Negative Impact on Flughafen Zürich AG (VTX:FHZN) Current Share Price Momentum?

Flughafen Zürich's (VTX:FHZN) stock is up by a considerable 10% over the past month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to Flughafen Zürich's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Flughafen Zürich

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 Flughafen Zürich is:

5.8% = CHF138m ÷ CHF2.4b (Based on the trailing twelve months to December 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CHF1 worth of shareholders' equity, the company generated CHF0.06 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Flughafen Zürich's Earnings Growth And 5.8% ROE

At first glance, Flughafen Zürich's ROE doesn't look very promising. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 9.0%. Hence, the flat earnings seen by Flughafen Zürich over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that Flughafen Zürich's reported growth was lower than the industry growth of 2.6% in the same period, which is not something we like to see.

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 Flughafen Zürich's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Flughafen Zürich 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. We infer that the company has been reinvesting all of its profits to grow its business.

Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 43%. However, Flughafen Zürich's ROE is predicted to rise to 9.8% despite there being no anticipated change in its payout ratio.

Summary

On the whole, we feel that the performance shown by Flughafen Zürich can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. 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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