Siltronic AG's (ETR:WAF) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that Siltronic's (ETR:WAF) stock increased significantly by 55% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Siltronic's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Siltronic

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Siltronic is:

23% = €191m ÷ €833m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.23.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Siltronic's Earnings Growth And 23% ROE

To begin with, Siltronic has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 3.6% the company's ROE is quite impressive. So, the substantial 40% net income growth seen by Siltronic over the past five years isn't overly surprising.

We then performed a comparison between Siltronic's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 35% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for WAF? You can find out in our latest intrinsic value infographic research report.

Is Siltronic Using Its Retained Earnings Effectively?

The three-year median payout ratio for Siltronic is 40%, which is moderately low. The company is retaining the remaining 60%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Siltronic is reinvesting its earnings efficiently.

Moreover, Siltronic is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 40% of its profits over the next three years. Accordingly, forecasts suggest that Siltronic's future ROE will be 20% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with Siltronic'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. 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. 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.
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