Is The Market Rewarding Fondia Oyj (HEL:FONDIA) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?

With its stock down 18% over the past three months, it is easy to disregard Fondia Oyj (HEL:FONDIA). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Fondia Oyj's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Fondia Oyj

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 Fondia Oyj is:

35% = €1.5m ÷ €4.3m (Based on the trailing twelve months to June 2023).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.35 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. 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 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.

Fondia Oyj's Earnings Growth And 35% ROE

To begin with, Fondia Oyj has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 8.0% also doesn't go unnoticed by us. Needless to say, we are quite surprised to see that Fondia Oyj's net income shrunk at a rate of 7.6% over the past five years. So, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.

That being said, we compared Fondia Oyj's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 7.7% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Fondia Oyj's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Fondia Oyj Using Its Retained Earnings Effectively?

Fondia Oyj's very high three-year median payout ratio of 162% over the last three years suggests that the company is paying its shareholders more than what it is earning and this explains the company's shrinking earnings. Paying a dividend higher than reported profits is not a sustainable move. To know the 2 risks we have identified for Fondia Oyj visit our risks dashboard for free.

Moreover, Fondia Oyj has been paying dividends for six years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 51% over the next three years.

Summary

In total, we're a bit ambivalent about Fondia Oyj's performance. Despite the high ROE, the company has a disappointing earnings growth number, due to its poor rate of reinvestment into its business. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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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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.