SCHOTT Pharma AG & Co. KGaA's (ETR:1SXP) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 14% over the past month, it is easy to disregard SCHOTT Pharma KGaA (ETR:1SXP). 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. Particularly, we will be paying attention to SCHOTT Pharma KGaA's ROE today.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for SCHOTT Pharma KGaA

How Do You 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 SCHOTT Pharma KGaA is:

20% = €151m ÷ €769m (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.20.

What Has ROE Got To Do With 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. 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 20% ROE

To begin with, SCHOTT Pharma KGaA seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 7.8%. Probably as a result of this, SCHOTT Pharma KGaA was able to see a decent growth of 15% over the last five years.

As a next step, we compared SCHOTT Pharma KGaA's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 14% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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?

In SCHOTT Pharma KGaA's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 15% (or a retention ratio of 85%), which suggests that the company is investing most of its profits to grow its business.

While SCHOTT Pharma KGaA has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 15%. As a result, SCHOTT Pharma KGaA's ROE is not expected to change by much either, which we inferred from the analyst estimate of 19% for future ROE.

Summary

On the whole, we feel that SCHOTT Pharma KGaA's performance has been quite good. 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. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.