Is The Market Rewarding Lindab International AB (publ) (STO:LIAB) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?

It is hard to get excited after looking at Lindab International's (STO:LIAB) recent performance, when its stock has declined 5.4% over the past three months. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study Lindab International's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Lindab International

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 Lindab International is:

4.3% = kr315m ÷ kr7.4b (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. So, this means that for every SEK1 of its shareholder's investments, the company generates a profit of SEK0.04.

What Has ROE Got To Do With 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Lindab International's Earnings Growth And 4.3% ROE

At first glance, Lindab International's ROE doesn't look very promising. Next, when compared to the average industry ROE of 11%, the company's ROE leaves us feeling even less enthusiastic. As a result, Lindab International reported a very low income growth of 2.2% over the past five years.

Next, on comparing with the industry net income growth, we found that Lindab International's reported growth was lower than the industry growth of 8.5% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for LIAB? You can find out in our latest intrinsic value infographic research report.

Is Lindab International Using Its Retained Earnings Effectively?

While Lindab International has a decent three-year median payout ratio of 46% (or a retention ratio of 54%), it has seen very little growth in earnings. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Lindab International has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 39% of its profits over the next three years. Regardless, the future ROE for Lindab International is predicted to rise to 14% despite there being not much change expected in its payout ratio.

Conclusion

Overall, we have mixed feelings about Lindab International. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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. 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.