Has H & M Hennes & Mauritz AB (publ)'s (STO:HM B) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

H & M Hennes & Mauritz (STO:HM B) has had a great run on the share market with its stock up by a significant 6.5% over the last month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to H & M Hennes & Mauritz's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for H & M Hennes & Mauritz is:

24% = kr11b ÷ kr46b (Based on the trailing twelve months to February 2025).

The 'return' is the yearly profit. That means that for every SEK1 worth of shareholders' equity, the company generated SEK0.24 in profit.

See our latest analysis for H & M Hennes & Mauritz

What Has ROE Got To Do With 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.

A Side By Side comparison of H & M Hennes & Mauritz's Earnings Growth And 24% ROE

To begin with, H & M Hennes & Mauritz has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 8.0% also doesn't go unnoticed by us. This likely paved the way for the modest 11% net income growth seen by H & M Hennes & Mauritz over the past five years.

Next, on comparing with the industry net income growth, we found that H & M Hennes & Mauritz's growth is quite high when compared to the industry average growth of 6.6% in the same period, which is great to see.

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). Doing so will help them establish if the stock's future looks promising or ominous. Is H & M Hennes & Mauritz fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is H & M Hennes & Mauritz Making Efficient Use Of Its Profits?

The really high three-year median payout ratio of 112% for H & M Hennes & Mauritz suggests that the company is paying its shareholders more than what it is earning. Still the company's earnings have grown respectably. Although, the high payout ratio is certainly something we would keep an eye on if the company is not able to keep up its growth, or if business deteriorates.

Besides, H & M Hennes & Mauritz has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 91%. However, H & M Hennes & Mauritz's ROE is predicted to rise to 31% despite there being no anticipated change in its payout ratio.

Summary

On the whole, we do feel that H & M Hennes & Mauritz has some positive attributes. Specifically, its high ROE which likely led to the growth in earnings. Bear in mind, the company reinvests little to none of its profits, which means that investors aren't necessarily reaping the full benefits of the high rate of return. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.