Could The Market Be Wrong About Zinzino AB (publ) (STO:ZZ B) Given Its Attractive Financial Prospects?

Explore Zinzino's Fair Values from the Community and select yours

With its stock down 22% over the past month, it is easy to disregard Zinzino (STO:ZZ B). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Zinzino'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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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 Zinzino is:

40% = kr190m ÷ kr476m (Based on the trailing twelve months to March 2025).

The 'return' is the profit over the last twelve months. That means that for every SEK1 worth of shareholders' equity, the company generated SEK0.40 in profit.

View our latest analysis for Zinzino

What Is The Relationship Between ROE And 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 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.

Zinzino's Earnings Growth And 40% ROE

To begin with, Zinzino has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 9.4% the company's ROE is quite impressive. As a result, Zinzino's exceptional 31% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Zinzino's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 16%.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Zinzino's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zinzino Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 72% (implying that it keeps only 28% of profits) for Zinzino suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Moreover, Zinzino 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. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 43% over the next three years.

Conclusion

In total, we are pretty happy with Zinzino's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. 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 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.