Are Sampo Oyj's (HEL:SAMPO) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

Sampo Oyj (HEL:SAMPO) has had a rough month with its share price down 5.9%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Sampo Oyj's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Sampo Oyj

How Do You 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 Sampo Oyj is:

12% = €1.2b ÷ €10b (Based on the trailing twelve months to March 2023).

The 'return' is the profit 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 €0.12 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of Sampo Oyj's Earnings Growth And 12% ROE

To start with, Sampo Oyj's ROE looks acceptable. Even when compared to the industry average of 11% the company's ROE looks quite decent. However, we are curious as to how Sampo Oyj's decent returns still resulted in flat growth for Sampo Oyj in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

We then compared Sampo Oyj's net income growth with the industry and found that the average industry growth rate was 8.0% in the same 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. Is SAMPO fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Sampo Oyj Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 86% (meaning, the company retains only 14% of profits) for Sampo Oyj suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Additionally, Sampo Oyj has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 76%. Regardless, the future ROE for Sampo Oyj is predicted to rise to 19% despite there being not much change expected in its payout ratio.

Conclusion

On the whole, we do feel that Sampo Oyj has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.