Siemens Healthineers AG's (ETR:SHL) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 7.1% over the past month, it is easy to disregard Siemens Healthineers (ETR:SHL). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Siemens Healthineers' 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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 Siemens Healthineers is:

10% = €2.0b ÷ €20b (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.10 in profit.

See our latest analysis for Siemens Healthineers

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. 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.

Siemens Healthineers' Earnings Growth And 10% ROE

To start with, Siemens Healthineers' ROE looks acceptable. Further, the company's ROE is similar to the industry average of 9.5%. Despite the modest returns, Siemens Healthineers' five year net income growth was quite low, averaging at only 4.0%. A few likely reasons that could be keeping earnings growth low are - the company has a high payout ratio or the business has allocated capital poorly, for instance.

When you consider the fact that the industry earnings have shrunk at a rate of 2.3% in the same 5-year period, the company's net income growth is pretty remarkable.

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. This then helps them determine if the stock is placed for a bright or bleak future. What is SHL worth today? The intrinsic value infographic in our free research report helps visualize whether SHL is currently mispriced by the market.

Is Siemens Healthineers Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 55% (or a retention ratio of 45%), most of Siemens Healthineers' profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

In addition, Siemens Healthineers has been paying dividends over a period of six years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. 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 48%. Still, forecasts suggest that Siemens Healthineers' future ROE will rise to 16% even though the the company's payout ratio is not expected to change by much.

Conclusion

Overall, we are quite pleased with Siemens Healthineers' performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.