UPM-Kymmene Oyj's (HEL:UPM) Financial Prospects Don't Look Very Positive: Could It Mean A Stock Price Drop In The Future?

UPM-Kymmene Oyj's (HEL:UPM) stock up by 4.0% over the past three months. However, in this article, we decided to focus on its weak financials, as long-term fundamentals ultimately dictate market outcomes. Particularly, we will be paying attention to UPM-Kymmene 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for UPM-Kymmene Oyj

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for UPM-Kymmene Oyj is:

6.2% = €736m ÷ €12b (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.06.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of UPM-Kymmene Oyj's Earnings Growth And 6.2% ROE

At first glance, UPM-Kymmene Oyj's ROE doesn't look very promising. Next, when compared to the average industry ROE of 16%, the company's ROE leaves us feeling even less enthusiastic. As a result, UPM-Kymmene Oyj's flat net income growth over the past five years doesn't come as a surprise given its lower ROE.

As a next step, we compared UPM-Kymmene Oyj's net income growth with the industry and discovered that the industry saw an average growth of 8.6% 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). Doing so will help them establish if the stock's future looks promising or ominous. Is UPM fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is UPM-Kymmene Oyj Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 59% (implying that the company keeps only 41% of its income) of its business to reinvest into its business), most of UPM-Kymmene Oyj's profits are being paid to shareholders, which explains the absence of growth in earnings.

Additionally, UPM-Kymmene 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 54% of its profits over the next three years. However, UPM-Kymmene Oyj's ROE is predicted to rise to 11% despite there being no anticipated change in its payout ratio.

Summary

Overall, we would be extremely cautious before making any decision on UPM-Kymmene Oyj. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.