Declining Stock and Solid Fundamentals: Is The Market Wrong About AIXTRON SE (ETR:AIXA)?

By
Simply Wall St
Published
January 10, 2022
XTRA:AIXA
Source: Shutterstock

AIXTRON (ETR:AIXA) has had a rough three months with its share price down 14%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to AIXTRON'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for AIXTRON

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 AIXTRON is:

13% = €68m ÷ €538m (Based on the trailing twelve months to September 2021).

The 'return' is the amount earned after tax 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 €0.13 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

AIXTRON's Earnings Growth And 13% ROE

To start with, AIXTRON's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 12%. This certainly adds some context to AIXTRON's exceptional 41% net income growth seen over the past five years. However, there could also be other drivers behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that AIXTRON's growth is quite high when compared to the industry average growth of 6.6% in the same period, which is great to see.

past-earnings-growth
XTRA:AIXA Past Earnings Growth January 10th 2022

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is AIXA worth today? The intrinsic value infographic in our free research report helps visualize whether AIXA is currently mispriced by the market.

Is AIXTRON Efficiently Re-investing Its Profits?

AIXTRON's three-year median payout ratio is a pretty moderate 29%, meaning the company retains 71% of its income. By the looks of it, the dividend is well covered and AIXTRON is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, AIXTRON has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 31%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 14%.

Summary

On the whole, we feel that AIXTRON's performance has been quite good. 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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