UPM-Kymmene Oyj's (HEL:UPM) Stock Financial Prospects Look Bleak: Should Shareholders Be Prepared For A Share Price Correction?

By
Simply Wall St
Published
April 19, 2021
HLSE:UPM

Most readers would already know that UPM-Kymmene Oyj's (HEL:UPM) stock increased by 5.8% over the past three months. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company's financials don't look very promising. Particularly, we will be paying attention to UPM-Kymmene Oyj's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for UPM-Kymmene Oyj

How Do You Calculate Return On Equity?

Return on equity 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 UPM-Kymmene Oyj is:

6.0% = €568m ÷ €9.5b (Based on the trailing twelve months to December 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every €1 worth of shareholders' equity, the company generated €0.06 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 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.

UPM-Kymmene Oyj's Earnings Growth And 6.0% ROE

When you first look at it, UPM-Kymmene Oyj's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 7.8%, the company's ROE leaves us feeling even less enthusiastic. Hence, the flat earnings seen by UPM-Kymmene Oyj over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared UPM-Kymmene Oyj's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 6.8% in the same period.

past-earnings-growth
HLSE:UPM Past Earnings Growth April 20th 2021

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). This then helps them determine if the stock is placed for a bright or bleak future. Is UPM-Kymmene Oyj fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is UPM-Kymmene Oyj Using Its Retained Earnings Effectively?

UPM-Kymmene Oyj has a high three-year median payout ratio of 59% (or a retention ratio of 41%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.

In addition, UPM-Kymmene 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. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 71% over the next three years. However, UPM-Kymmene Oyj's future ROE is expected to rise to 11% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning UPM-Kymmene Oyj. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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. 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.
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