Is Weakness In LVMH Moët Hennessy - Louis Vuitton, Société Européenne (EPA:MC) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 11% over the past three months, it is easy to disregard LVMH Moët Hennessy - Louis Vuitton Société Européenne (EPA:MC). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study LVMH Moët Hennessy - Louis Vuitton Société Européenne's ROE in this article.

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.

Check out our latest analysis for LVMH Moët Hennessy - Louis Vuitton Société Européenne

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 LVMH Moët Hennessy - Louis Vuitton Société Européenne is:

25% = €16b ÷ €63b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.25 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. 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. 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.

LVMH Moët Hennessy - Louis Vuitton Société Européenne's Earnings Growth And 25% ROE

First thing first, we like that LVMH Moët Hennessy - Louis Vuitton Société Européenne has an impressive ROE. Further, even comparing with the industry average if 25%, the company's ROE is quite respectable. Therefore, it might not be wrong to say that the impressive five year 24% net income growth seen by LVMH Moët Hennessy - Louis Vuitton Société Européenne was probably achieved as a result of the high ROE.

As a next step, we compared LVMH Moët Hennessy - Louis Vuitton Société Européenne's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 24% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for MC? You can find out in our latest intrinsic value infographic research report.

Is LVMH Moët Hennessy - Louis Vuitton Société Européenne Efficiently Re-investing Its Profits?

LVMH Moët Hennessy - Louis Vuitton Société Européenne's three-year median payout ratio is a pretty moderate 43%, meaning the company retains 57% of its income. By the looks of it, the dividend is well covered and LVMH Moët Hennessy - Louis Vuitton Société Européenne is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, LVMH Moët Hennessy - Louis Vuitton Société Européenne 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 45% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 22%.

Conclusion

Overall, we are quite pleased with LVMH Moët Hennessy - Louis Vuitton Société Européenne's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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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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.