Carl Zeiss Meditec AG's (ETR:AFX) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?
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Carl Zeiss Meditec (ETR:AFX) has had a rough month with its share price down 17%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Carl Zeiss Meditec's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How To Calculate Return On Equity?
Return on equity 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 Carl Zeiss Meditec is:
7.7% = €158m ÷ €2.1b (Based on the trailing twelve months to December 2024).
The 'return' is the yearly profit. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.08 in profit.
Check out our latest analysis for Carl Zeiss Meditec
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Carl Zeiss Meditec's Earnings Growth And 7.7% ROE
When you first look at it, Carl Zeiss Meditec's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.5%. Having said that, Carl Zeiss Meditec has shown a modest net income growth of 8.9% over the past five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. 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.
Next, on comparing with the industry net income growth, we found that the growth figure reported by Carl Zeiss Meditec compares quite favourably to the industry average, which shows a decline of 2.3% over the last few years.