Do Its Financials Have Any Role To Play In Driving Ypsomed Holding AG's (VTX:YPSN) Stock Up Recently?

editorial-team@simplywallst.com (Simply Wall St)

Mon, Feb 26, 2024, 10:31 PM 4 min read

Ypsomed Holding's (VTX:YPSN) stock is up by a considerable 24% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Ypsomed Holding'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.

See our latest analysis for Ypsomed Holding

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Ypsomed Holding is:

13% = CHF72m ÷ CHF574m (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. That means that for every CHF1 worth of shareholders' equity, the company generated CHF0.13 in profit.

What Is The Relationship Between ROE And 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. 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.

Ypsomed Holding's Earnings Growth And 13% ROE

To start with, Ypsomed Holding's ROE looks acceptable. Even so, when compared with the average industry ROE of 17%, we aren't very excited. Additionally, the flat earnings seen by Ypsomed Holding over the past five years doesn't paint a very bright picture. Bear in mind, the company does have a respectable level of ROE. It is just that the industry ROE is higher. Hence there might be some other aspects that are causing the flat growth in earnings. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitve pressures.

Next, on comparing with the industry net income growth, we found that Ypsomed Holding's reported growth was lower than the industry growth of 11% over the last few years, which is not something we like to see.

past-earnings-growth — SWX:YPSN Past Earnings Growth February 27th 2024

Earnings growth is a huge factor in stock valuation. 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. 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 Ypsomed Holding is trading on a high P/E or a low P/E, relative to its industry.

Is Ypsomed Holding Making Efficient Use Of Its Profits?

Despite having a moderate three-year median payout ratio of 28% (meaning the company retains72% of profits) in the last three-year period, Ypsomed Holding's earnings growth was more or les flat. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, Ypsomed Holding has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 33% of its profits over the next three years. However, Ypsomed Holding's ROE is predicted to rise to 19% despite there being no anticipated change in its payout ratio.

Conclusion

On the whole, we do feel that Ypsomed Holding has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return and is reinvesting a huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.