- Aerospace & Defense
Is Leonardo S.p.a.'s (BIT:LDO) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?
Leonardo (BIT:LDO) has had a great run on the share market with its stock up by a significant 37% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Leonardo's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Leonardo
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 Leonardo is:
11% = €745m ÷ €7.0b (Based on the trailing twelve months to December 2022).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.11.
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.
A Side By Side comparison of Leonardo's Earnings Growth And 11% ROE
At first glance, Leonardo seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 11%. This certainly adds some context to Leonardo's moderate 14% net income growth seen over the past five years.
We then performed a comparison between Leonardo's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 14% in the same period.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is LDO fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Leonardo Using Its Retained Earnings Effectively?
In Leonardo's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 12% (or a retention ratio of 88%), which suggests that the company is investing most of its profits to grow its business.
Moreover, Leonardo is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 9.1% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.
In total, we are pretty happy with Leonardo's performance. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
Valuation is complex, but we're helping make it simple.
Find out whether Leonardo is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
Leonardo S.p.a., an industrial and technological company, engages in the helicopters, defense electronics and security systems, aeronautics, space, and other businesses in Italy, the United Kingdom, rest of Europe, the United States, and internationally.
Undervalued with solid track record.