LVMH Moët Hennessy - Louis Vuitton, Société Européenne's (EPA:MC) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

LVMH Moët Hennessy - Louis Vuitton Société Européenne (EPA:MC) has had a rough three months with its share price down 31%. 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. In this article, we decided to focus on LVMH Moët Hennessy - Louis Vuitton Société Européenne's ROE.

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.

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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:

19% = €13b ÷ €69b (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.19 in profit.

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

What Has ROE Got To Do With 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

LVMH Moët Hennessy - Louis Vuitton Société Européenne's Earnings Growth And 19% ROE

To begin with, LVMH Moët Hennessy - Louis Vuitton Société Européenne seems to have a respectable ROE. On comparing with the average industry ROE of 14% the company's ROE looks pretty remarkable. This certainly adds some context to LVMH Moët Hennessy - Louis Vuitton Société Européenne's decent 19% net income growth seen over the past five years.

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 19% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is MC fairly valued? This infographic on the company's intrinsic value has everything you need to know.

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

With a three-year median payout ratio of 44% (implying that the company retains 56% of its profits), it seems that LVMH Moët Hennessy - Louis Vuitton Société Européenne is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, LVMH Moët Hennessy - Louis Vuitton Société Européenne has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. 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 48%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 18%.

Summary

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. 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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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.