Is Eckert & Ziegler Strahlen- und Medizintechnik AG's (ETR:EUZ) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Eckert & Ziegler Strahlen- und Medizintechnik's (ETR:EUZ) stock is up by a considerable 27% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Eckert & Ziegler Strahlen- und Medizintechnik's ROE today.

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 Eckert & Ziegler Strahlen- und Medizintechnik

How Is ROE Calculated?

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 Eckert & Ziegler Strahlen- und Medizintechnik is:

13% = €28m ÷ €225m (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.13 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Eckert & Ziegler Strahlen- und Medizintechnik's Earnings Growth And 13% ROE

To start with, Eckert & Ziegler Strahlen- und Medizintechnik's ROE looks acceptable. Especially when compared to the industry average of 7.7% the company's ROE looks pretty impressive. This probably laid the ground for Eckert & Ziegler Strahlen- und Medizintechnik's moderate 10% net income growth seen over the past five years.

As a next step, we compared Eckert & Ziegler Strahlen- und Medizintechnik's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 5.8%.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Eckert & Ziegler Strahlen- und Medizintechnik is trading on a high P/E or a low P/E, relative to its industry.

Is Eckert & Ziegler Strahlen- und Medizintechnik Efficiently Re-investing Its Profits?

Eckert & Ziegler Strahlen- und Medizintechnik has a three-year median payout ratio of 38%, which implies that it retains the remaining 62% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Additionally, Eckert & Ziegler Strahlen- und Medizintechnik has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 26% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.

Conclusion

In total, we are pretty happy with Eckert & Ziegler Strahlen- und Medizintechnik's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.