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). 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 LVMH Moët Hennessy - Louis Vuitton Société Européenne'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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

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 LVMH Moët Hennessy - Louis Vuitton Société Européenne is:

22% = €15b ÷ €66b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.22.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

LVMH Moët Hennessy - Louis Vuitton Société Européenne's Earnings Growth And 22% ROE

To begin with, LVMH Moët Hennessy - Louis Vuitton Société Européenne has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 18% also doesn't go unnoticed by us. So, the substantial 23% net income growth seen by LVMH Moët Hennessy - Louis Vuitton Société Européenne over the past five years isn't overly surprising.

Next, on comparing LVMH Moët Hennessy - Louis Vuitton Société Européenne's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 23% over the last few years.

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 has a three-year median payout ratio of 43% (where it is retaining 57% of its income) which is not too low or not too high. So it seems that LVMH Moët Hennessy - Louis Vuitton Société Européenne is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, LVMH Moët Hennessy - Louis Vuitton Société Européenne 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. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 53% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Conclusion

On the whole, we feel that LVMH Moët Hennessy - Louis Vuitton Société Européenne's performance has been quite good. 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.

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

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.