Is Weakness In Hermès International Société en commandite par actions (EPA:RMS) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

It is hard to get excited after looking at Hermès International Société en commandite par actions' (EPA:RMS) recent performance, when its stock has declined 12% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Hermès International Société en commandite par actions' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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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 Hermès International Société en commandite par actions is:

27% = €4.5b ÷ €17b (Based on the trailing twelve months to June 2025).

The 'return' is the yearly profit. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.27 in profit.

Check out our latest analysis for Hermès International Société en commandite par actions

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 27% ROE

Firstly, we acknowledge that Hermès International Société en commandite par actions has a significantly high ROE. Secondly, even when compared to the industry average of 17% the company's ROE is quite impressive. As a result, Hermès International Société en commandite par actions' exceptional 24% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Hermès International Société en commandite par actions' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 14%.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Hermès International Société en commandite par actions''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

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 36% (where it is retaining 64% of its income) which is not too low or not too high. So it seems that Hermès International Société en commandite par actions 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, Hermès International Société en commandite par actions 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

Overall, we are quite pleased with Hermès International Société en commandite par actions' 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. 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.