Thermo Fisher Scientific Inc.'s (NYSE:TMO) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

Thermo Fisher Scientific (NYSE:TMO) has had a rough three months with its share price down 24%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Thermo Fisher Scientific's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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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 Thermo Fisher Scientific is:

13% = US$6.5b ÷ US$49b (Based on the trailing twelve months to March 2025).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.13 in profit.

See our latest analysis for Thermo Fisher Scientific

What Has ROE Got To Do With 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. 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.

Thermo Fisher Scientific's Earnings Growth And 13% ROE

At first glance, Thermo Fisher Scientific seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 8.9%. Given the circumstances, we can't help but wonder why Thermo Fisher Scientific saw little to no growth in the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital.

We then compared Thermo Fisher Scientific's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 3.8% in the same 5-year period, which is a bit concerning.

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 TMO? You can find out in our latest intrinsic value infographic research report.

Is Thermo Fisher Scientific Using Its Retained Earnings Effectively?

Thermo Fisher Scientific's low three-year median payout ratio of 8.8%, (meaning the company retains91% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.

In addition, Thermo Fisher Scientific has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 6.4% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 17%, over the same period.

Summary

Overall, we feel that Thermo Fisher Scientific certainly does have some positive factors to consider. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.