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Chocoladefabriken Lindt & Sprüngli's (VTX:LISN) stock is up by 6.7% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Chocoladefabriken Lindt & Sprüngli's ROE.
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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Chocoladefabriken Lindt & Sprüngli
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 Chocoladefabriken Lindt & Sprüngli is:
16% = CHF671m ÷ CHF4.3b (Based on the trailing twelve months to December 2023).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CHF1 of shareholders' capital it has, the company made CHF0.16 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.
Chocoladefabriken Lindt & Sprüngli's Earnings Growth And 16% ROE
At first glance, Chocoladefabriken Lindt & Sprüngli seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 16%. This certainly adds some context to Chocoladefabriken Lindt & Sprüngli's moderate 7.4% net income growth seen over the past five years.
We then compared Chocoladefabriken Lindt & Sprüngli's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 3.6% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Chocoladefabriken Lindt & Sprüngli's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.