Georg Fischer AG's (VTX:GF) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

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

Tue, Oct 17, 2023, 1:42 AM 4 min read

With its stock down 26% over the past three months, it is easy to disregard Georg Fischer (VTX:GF). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Georg Fischer's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 Georg Fischer

How To Calculate Return On Equity?

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 Georg Fischer is:

17% = CHF282m ÷ CHF1.6b (Based on the trailing twelve months to June 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 CHF0.17 in profit.

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. 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.

A Side By Side comparison of Georg Fischer's Earnings Growth And 17% ROE

To begin with, Georg Fischer seems to have a respectable ROE. Even when compared to the industry average of 17% the company's ROE looks quite decent. Given the circumstances, we can't help but wonder why Georg Fischer saw little to no growth in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. These include low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that Georg Fischer's reported growth was lower than the industry growth of 2.2% over the last few years, which is not something we like to see.

past-earnings-growth — SWX:GF Past Earnings Growth October 17th 2023

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is GF fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Georg Fischer Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 39% (implying that the company keeps 61% of its income) over the last three years, Georg Fischer has seen a negligible amount of growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, Georg Fischer 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 38%. Accordingly, forecasts suggest that Georg Fischer's future ROE will be 19% which is again, similar to the current ROE.

Conclusion

Overall, we feel that Georg Fischer certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.