Is Heidelberg Materials AG's (ETR:HEI) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Heidelberg Materials (ETR:HEI) has had a great run on the share market with its stock up by a significant 30% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Heidelberg Materials' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Heidelberg Materials

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Heidelberg Materials is:

11% = €2.0b ÷ €19b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.11 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Heidelberg Materials' Earnings Growth And 11% ROE

At first glance, Heidelberg Materials seems to have a decent ROE. Even when compared to the industry average of 9.2% the company's ROE looks quite decent. Consequently, this likely laid the ground for the impressive net income growth of 34% seen over the past five years by Heidelberg Materials. However, there could also be other drivers behind this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Heidelberg Materials' 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 12%.

Earnings growth is an important metric to consider when valuing a stock. 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. What is HEI worth today? The intrinsic value infographic in our free research report helps visualize whether HEI is currently mispriced by the market.

Is Heidelberg Materials Making Efficient Use Of Its Profits?

Heidelberg Materials' three-year median payout ratio is a pretty moderate 28%, meaning the company retains 72% of its income. By the looks of it, the dividend is well covered and Heidelberg Materials is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Heidelberg Materials 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 28%. As a result, Heidelberg Materials' ROE is not expected to change by much either, which we inferred from the analyst estimate of 10% for future ROE.

Conclusion

In total, we are pretty happy with Heidelberg Materials' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.