Christian Dior SE's (EPA:CDI) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Christian Dior (EPA:CDI) has had a rough three months with its share price down 14%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Christian Dior'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Christian Dior

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 Christian Dior is:

26% = €16b ÷ €60b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. That means that for every €1 worth of shareholders' equity, the company generated €0.26 in profit.

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.

Christian Dior's Earnings Growth And 26% ROE

To begin with, Christian Dior has a pretty high ROE which is interesting. Additionally, a comparison with the average industry ROE of 25% also portrays the company's ROE in a good light. Therefore, it might not be wrong to say that the impressive five year 25% net income growth seen by Christian Dior was probably achieved as a result of the high ROE.

Next, on comparing Christian Dior's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 25% over the last few years.

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. Is Christian Dior fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Christian Dior Making Efficient Use Of Its Profits?

Christian Dior has a three-year median payout ratio of 37% (where it is retaining 63% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Christian Dior is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Christian Dior has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

In total, we are pretty happy with Christian Dior's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 1 risk we have identified for Christian Dior by visiting our risks dashboard for free on our platform here.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com