Are Industrie De Nora S.p.A.'s (BIT:DNR) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

Industrie De Nora (BIT:DNR) has had a rough three months with its share price down 18%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Industrie De Nora's 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.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Industrie De Nora is:

8.7% = €83m ÷ €954m (Based on the trailing twelve months to December 2024).

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 €0.09 in profit.

Check out our latest analysis for Industrie De Nora

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Industrie De Nora's Earnings Growth And 8.7% ROE

On the face of it, Industrie De Nora's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 8.4%, we may spare it some thought. Moreover, we are quite pleased to see that Industrie De Nora's net income grew significantly at a rate of 28% over the last five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Industrie De Nora's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 20% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. 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 Industrie De Nora is trading on a high P/E or a low P/E, relative to its industry.

Is Industrie De Nora Making Efficient Use Of Its Profits?

Industrie De Nora's three-year median payout ratio to shareholders is 25%, which is quite low. This implies that the company is retaining 75% of its profits. So it looks like Industrie De Nora is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Along with seeing a growth in earnings, Industrie De Nora only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 24% of its profits over the next three years. As a result, Industrie De Nora's ROE is not expected to change by much either, which we inferred from the analyst estimate of 8.7% for future ROE.

Conclusion

In total, it does look like Industrie De Nora has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.