BELIMO Holding (VTX:BEAN) has had a rough month with its share price down 8.7%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on BELIMO Holding's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for BELIMO Holding
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 BELIMO Holding is:
26% = CHF137m ÷ CHF530m (Based on the trailing twelve months to December 2023).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CHF1 of shareholders' capital it has, the company made CHF0.26 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. 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.
BELIMO Holding's Earnings Growth And 26% ROE
First thing first, we like that BELIMO Holding has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 17% which is quite remarkable. This probably laid the groundwork for BELIMO Holding's moderate 6.8% net income growth seen over the past five years.
Given that the industry shrunk its earnings at a rate of 1.4% over the last few years, the net income growth of the company is quite impressive.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if BELIMO Holding is trading on a high P/E or a low P/E, relative to its industry.