Is The Market Rewarding Jenoptik AG (ETR:JEN) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?

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

Thu, Aug 8, 2024, 5:56 AM 4 min read

Jenoptik (ETR:JEN) has had a rough three months with its share price down 8.3%. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Jenoptik'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Jenoptik

How To Calculate Return On Equity?

ROE 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 Jenoptik is:

8.6% = €77m ÷ €902m (Based on the trailing twelve months to March 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 €0.09.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Jenoptik's Earnings Growth And 8.6% ROE

On the face of it, Jenoptik's ROE is not much to talk about. However, its ROE is similar to the industry average of 9.0%, so we won't completely dismiss the company. On the other hand, Jenoptik reported a fairly low 2.7% net income growth over the past five years. Bear in mind, the company's ROE is not very high . So this could also be one of the reasons behind the company's low growth in earnings.

We then compared Jenoptik's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 7.5% in the same 5-year period, which is a bit concerning.

past-earnings-growth — XTRA:JEN Past Earnings Growth August 8th 2024

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Jenoptik fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jenoptik Efficiently Re-investing Its Profits?

Jenoptik has a low three-year median payout ratio of 24% (meaning, the company keeps the remaining 76% of profits) which means that the company is retaining more of its earnings. However, the low earnings growth number doesn't reflect this fact. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Moreover, Jenoptik has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 20% of its profits over the next three years. Still, forecasts suggest that Jenoptik's future ROE will rise to 12% even though the the company's payout ratio is not expected to change by much.

Conclusion

On the whole, we feel that the performance shown by Jenoptik can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.