Sampo Oyj's (HEL:SAMPO) Stock Is Going Strong: Have Financials A Role To Play?

Most readers would already be aware that Sampo Oyj's (HEL:SAMPO) stock increased significantly by 6.3% over the past month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Sampo Oyj's ROE.

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 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 Sampo 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 Sampo Oyj is:

12% = €879m ÷ €7.2b (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.12.

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 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 12% the company's ROE looks quite decent. Despite the moderate return on equity, Sampo Oyj has posted a net income growth of 2.1% over the past five years. We reckon that a low growth, when returns are moderate could be the result of certain circumstances like low earnings retention or poor allocation of capital.

We then compared Sampo Oyj's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 4.4% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. 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 SAMPO fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Sampo Oyj Making Efficient Use Of Its Profits?

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

In addition, Sampo Oyj has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 74%. Still, forecasts suggest that Sampo Oyj's future ROE will rise to 15% even though the the company's payout ratio is not expected to change by much.

Conclusion

On the whole, we do feel that Sampo Oyj has some positive attributes. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.