Thermo Fisher Scientific Inc.'s (NYSE:TMO) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

It is hard to get excited after looking at Thermo Fisher Scientific's (NYSE:TMO) recent performance, when its stock has declined 5.0% over the past month. 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. Specifically, we decided to study Thermo Fisher Scientific's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Thermo Fisher Scientific

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for Thermo Fisher Scientific is:

16% = US$7.0b ÷ US$44b (Based on the trailing twelve months to December 2022).

The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.16 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Thermo Fisher Scientific's Earnings Growth And 16% ROE

To start with, Thermo Fisher Scientific's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 14%. This certainly adds some context to Thermo Fisher Scientific's exceptional 27% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Thermo Fisher Scientific's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 31% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Thermo Fisher Scientific fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Thermo Fisher Scientific Efficiently Re-investing Its Profits?

Thermo Fisher Scientific's three-year median payout ratio to shareholders is 5.9%, which is quite low. This implies that the company is retaining 94% of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Besides, Thermo Fisher Scientific 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 4.9%. Regardless, the future ROE for Thermo Fisher Scientific is predicted to rise to 26% despite there being not much change expected in its payout ratio.

Summary

On the whole, we feel that Thermo Fisher Scientific's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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.

What are the risks and opportunities for Thermo Fisher Scientific?

NYSE:TMO

Thermo Fisher Scientific

Thermo Fisher Scientific Inc. provides life sciences solutions, analytical instruments, specialty diagnostics, and laboratory products and biopharma services in the United States and internationally.Show more

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Rewards

• Earnings are forecast to grow 12.35% per year

Risks

• Significant insider selling over the past 3 months

• Has a high level of debt

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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.