Is Weakness In SCHOTT Pharma AG & Co. KGaA (ETR:1SXP) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 6.1% over the past month, it is easy to disregard SCHOTT Pharma KGaA (ETR:1SXP). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on SCHOTT Pharma KGaA's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for SCHOTT Pharma KGaA

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for SCHOTT Pharma KGaA is:

22% = €158m ÷ €721m (Based on the trailing twelve months to December 2023).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.22 in profit.

What Is The Relationship Between ROE And 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.

SCHOTT Pharma KGaA's Earnings Growth And 22% ROE

To begin with, SCHOTT Pharma KGaA has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 8.5% also doesn't go unnoticed by us. This probably laid the groundwork for SCHOTT Pharma KGaA's moderate 20% net income growth seen over the past five years.

Next, on comparing SCHOTT Pharma KGaA's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 19% over the last few years.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is 1SXP fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is SCHOTT Pharma KGaA Using Its Retained Earnings Effectively?

SCHOTT Pharma KGaA's three-year median payout ratio to shareholders is 15% (implying that it retains 85% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 16%. As a result, SCHOTT Pharma KGaA's ROE is not expected to change by much either, which we inferred from the analyst estimate of 21% for future ROE.

Conclusion

In total, we are pretty happy with SCHOTT Pharma KGaA's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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. 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.