Will Weakness in Hermès International Société en commandite par actions' (EPA:RMS) Stock Prove Temporary Given Strong Fundamentals?

By
Simply Wall St
Published
March 16, 2022
ENXTPA:RMS
Source: Shutterstock

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 30% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Hermès International Société en commandite par actions' 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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

How To Calculate Return On Equity?

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:

26% = €2.5b ÷ €9.4b (Based on the trailing twelve months to December 2021).

The 'return' is the yearly profit. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.26.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 26% ROE

First thing first, we like that Hermès International Société en commandite par actions has an impressive ROE. Further, even comparing with the industry average if 25%, the company's ROE is quite respectable. Therefore, it looks like the high ROE is what probably supported Hermès International Société en commandite par actions' modest 13% growth over the past five years.

Next, on comparing Hermès International Société en commandite par actions' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 13% in the same period.

past-earnings-growth
ENXTPA:RMS Past Earnings Growth March 16th 2022

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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Hermès International Société en commandite par actions is trading on a high P/E or a low P/E, relative 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 32%, which implies that it retains the remaining 68% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Besides, Hermès International Société en commandite par actions has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 39%. Accordingly, forecasts suggest that Hermès International Société en commandite par actions' future ROE will be 23% which is again, similar to the current ROE.

Conclusion

In total, we are pretty happy 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. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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