Declining Stock and Solid Fundamentals: Is The Market Wrong About Valmet Oyj (HEL:VALMT)?

With its stock down 4.5% over the past week, it is easy to disregard Valmet Oyj (HEL:VALMT). 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 Valmet Oyj's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Valmet Oyj

How Do You 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 Valmet Oyj is:

14% = €344m ÷ €2.4b (Based on the trailing twelve months to March 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 €0.14.

What Is The Relationship Between ROE And 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. 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.

Valmet Oyj's Earnings Growth And 14% ROE

To begin with, Valmet Oyj seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 14%. This probably goes some way in explaining Valmet Oyj's moderate 16% growth over the past five years amongst other factors.

We then performed a comparison between Valmet Oyj's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 16% in the same 5-year 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. This then helps them determine if the stock is placed for a bright or bleak future. Is VALMT fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Valmet Oyj Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 63% (or a retention ratio of 37%) for Valmet Oyj suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Valmet Oyj 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 69%. Accordingly, forecasts suggest that Valmet Oyj's future ROE will be 14% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with Valmet Oyj's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com