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It is hard to get excited after looking at Siemens Healthineers' (ETR:SHL) recent performance, when its stock has declined 5.2% over the past three months. 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 Siemens Healthineers' 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Siemens Healthineers
How Is ROE Calculated?
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 Siemens Healthineers is:
10% = €1.9b ÷ €18b (Based on the trailing twelve months to June 2024).
The 'return' is the yearly profit. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.10.
What Is The Relationship Between ROE And 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. 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.
A Side By Side comparison of Siemens Healthineers' Earnings Growth And 10% ROE
At first glance, Siemens Healthineers seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 9.6%. Siemens Healthineers' decent returns aren't reflected in Siemens Healthineers'mediocre five year net income growth average of 3.5%. We reckon that a low growth, when returns are moderate could be the result of certain circumstances like low earnings retention or poor allocation of capital.
When you consider the fact that the industry earnings have shrunk at a rate of 1.1% in the same 5-year period, the company's net income growth is pretty remarkable.
Earnings growth is an important metric to consider when valuing a stock. 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 Siemens Healthineers fairly valued compared to other companies? These 3 valuation measures might help you decide.