Orion Oyj's (HEL:ORNBV) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

Orion Oyj (HEL:ORNBV) has had a rough month with its share price down 9.4%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Orion Oyj's ROE in this article.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Orion 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 Orion Oyj is:

36% = €332m ÷ €924m (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every €1 worth of shareholders' equity, the company generated €0.36 in profit.

What Has ROE Got To Do With 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. 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 Orion Oyj's Earnings Growth And 36% ROE

First thing first, we like that Orion Oyj has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 14% which is quite remarkable. Probably as a result of this, Orion Oyj was able to see a decent net income growth of 5.4% over the last five years.

Next, on comparing with the industry net income growth, we found that Orion Oyj's reported growth was lower than the industry growth of 13% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. 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. What is ORNBV worth today? The intrinsic value infographic in our free research report helps visualize whether ORNBV is currently mispriced by the market.

Is Orion Oyj Making Efficient Use Of Its Profits?

The really high three-year median payout ratio of 105% for Orion Oyj suggests that the company is paying its shareholders more than what it is earning. In spite of this, the company was able to grow its earnings respectably, as we saw above. It would still be worth keeping an eye on that high payout ratio, if for some reason the company runs into problems and business deteriorates. You can see the 2 risks we have identified for Orion Oyj by visiting our risks dashboard for free on our platform here.

Besides, Orion Oyj has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 79% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.

Conclusion

On the whole, we do feel that Orion Oyj has some positive attributes. Its earnings have grown respectably as we saw earlier, probably due to its high returns. However, it does reinvest little to almost none of its profits, so we wonder what effect this could have on its future growth prospects. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.