Landis+Gyr Group (VTX:LAND) has had a great run on the share market with its stock up by a significant 21% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Landis+Gyr Group's ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Landis+Gyr Group
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Landis+Gyr Group is:
16% = US$231m ÷ US$1.5b (Based on the trailing twelve months to September 2022).
The 'return' refers to a company's earnings over the last year. That means that for every CHF1 worth of shareholders' equity, the company generated CHF0.16 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
Landis+Gyr Group's Earnings Growth And 16% ROE
To begin with, Landis+Gyr Group seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 16%. For this reason, Landis+Gyr Group's five year net income decline of 20% raises the question as to why the decent ROE didn't translate into growth. So, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.
That being said, we compared Landis+Gyr Group's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 5.5% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is LAND fairly valued? This infographic on the company's intrinsic value has everything you need to know.