Will Weakness in Lagercrantz Group AB (publ)'s (STO:LAGR B) Stock Prove Temporary Given Strong Fundamentals?

It is hard to get excited after looking at Lagercrantz Group's (STO:LAGR B) recent performance, when its stock has declined 11% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Lagercrantz Group's ROE today.

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.

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How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Lagercrantz Group is:

26% = kr1.1b ÷ kr4.1b (Based on the trailing twelve months to June 2025).

The 'return' is the amount earned after tax over the last twelve months. That means that for every SEK1 worth of shareholders' equity, the company generated SEK0.26 in profit.

See our latest analysis for Lagercrantz Group

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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 Lagercrantz Group's Earnings Growth And 26% ROE

First thing first, we like that Lagercrantz Group has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 15% which is quite remarkable. As a result, Lagercrantz Group's exceptional 21% net income growth seen over the past five years, doesn't come as a surprise.

We then performed a comparison between Lagercrantz Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 19% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Lagercrantz Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Lagercrantz Group Efficiently Re-investing Its Profits?

Lagercrantz Group's three-year median payout ratio is a pretty moderate 43%, meaning the company retains 57% of its income. By the looks of it, the dividend is well covered and Lagercrantz Group is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Lagercrantz Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 42% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 25%.

Summary

Overall, we are quite pleased with Lagercrantz Group'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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.