Are Robust Financials Driving The Recent Rally In Hermès International Société en commandite par actions' (EPA:RMS) Stock?

Hermès International Société en commandite par actions (EPA:RMS) has had a great run on the share market with its stock up by a significant 5.5% over the last month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Hermès International Société en commandite par actions' ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Hermès International Société en commandite par actions

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 Hermès International Société en commandite par actions is:

30% = €4.0b ÷ €13b (Based on the trailing twelve months to June 2023).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.30 in profit.

What Is The Relationship Between ROE And 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 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.

Hermès International Société en commandite par actions' Earnings Growth And 30% ROE

To begin with, Hermès International Société en commandite par actions has a pretty high ROE which is interesting. Additionally, a comparison with the average industry ROE of 29% also portrays the company's ROE in a good light. Given the circumstances, the significant 25% net income growth seen by Hermès International Société en commandite par actions over the last five years is not surprising.

As a next step, we compared Hermès International Société en commandite par actions' 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 23% in the same period.

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). This then helps them determine if the stock is placed for a bright or bleak future. Is Hermès International Société en commandite par actions fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hermès International Société en commandite par actions Efficiently Re-investing Its Profits?

Hermès International Société en commandite par actions has a three-year median payout ratio of 33% (where it is retaining 67% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Hermès International Société en commandite par actions is reinvesting its earnings efficiently.

Additionally, Hermès International Société en commandite par actions 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. 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 35%. However, Hermès International Société en commandite par actions' future ROE is expected to decline to 23% despite there being not much change anticipated in the company's payout ratio.

Summary

Overall, we are quite pleased with Hermès International Société en commandite par actions' performance. 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.