Sartorius Stedim Biotech S.A. (EPA:DIM) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

By
Simply Wall St
Published
June 02, 2021
ENXTPA:DIM

Sartorius Stedim Biotech (EPA:DIM) has had a rough month with its share price down 7.6%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Sartorius Stedim Biotech's ROE today.

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.

Check out our latest analysis for Sartorius Stedim Biotech

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 Sartorius Stedim Biotech is:

26% = €403m ÷ €1.6b (Based on the trailing twelve months to March 2021).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.26 in profit.

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.

A Side By Side comparison of Sartorius Stedim Biotech's Earnings Growth And 26% ROE

Firstly, we acknowledge that Sartorius Stedim Biotech has a significantly high ROE. Secondly, even when compared to the industry average of 15% the company's ROE is quite impressive. As a result, Sartorius Stedim Biotech's exceptional 20% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Sartorius Stedim Biotech's 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 21% in the same period.

past-earnings-growth
ENXTPA:DIM Past Earnings Growth June 3rd 2021

Earnings growth is a huge factor in stock valuation. 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. Is Sartorius Stedim Biotech fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sartorius Stedim Biotech Making Efficient Use Of Its Profits?

Sartorius Stedim Biotech's ' three-year median payout ratio is on the lower side at 20% implying that it is retaining a higher percentage (80%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Moreover, Sartorius Stedim Biotech 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 23% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 24%.

Conclusion

On the whole, we feel that Sartorius Stedim Biotech'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. 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.
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