Stock Analysis

Are Strong Financial Prospects The Force That Is Driving The Momentum In Kering SA's EPA:KER) Stock?

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ENXTPA:KER
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Kering (EPA:KER) has had a great run on the share market with its stock up by a significant 18% over the last month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Kering'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out the opportunities and risks within the FR Luxury industry.

How Is ROE Calculated?

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 Kering is:

27% = €3.8b ÷ €14b (Based on the trailing twelve months to June 2022).

The 'return' is the income the business earned over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.27 in profit.

Why Is ROE Important For 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 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.

Kering's Earnings Growth And 27% ROE

To begin with, Kering has a pretty high ROE which is interesting. Even when compared to the industry average of 28% the company's ROE is pretty decent. So, Kering's moderate 16% growth over the past five years was probably backed by the high ROE.

We then performed a comparison between Kering's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 17% in the same period.

past-earnings-growth
ENXTPA:KER Past Earnings Growth November 29th 2022

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is KER fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Kering Making Efficient Use Of Its Profits?

Kering has a healthy combination of a moderate three-year median payout ratio of 46% (or a retention ratio of 54%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Moreover, Kering is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. 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 49%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 24%.

Conclusion

On the whole, we feel that Kering's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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