Are Robust Financials Driving The Recent Rally In Universal Music Group N.V.'s (AMS:UMG) Stock?

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

Thu, May 15, 2025, 2:48 AM 4 min read

Universal Music Group (AMS:UMG) has had a great run on the share market with its stock up by a significant 14% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Universal Music Group's ROE today.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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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 Universal Music Group is:

46% = €2.1b ÷ €4.6b (Based on the trailing twelve months to December 2024).

The 'return' is the profit over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.46.

View our latest analysis for Universal Music Group

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. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Universal Music Group's Earnings Growth And 46% ROE

Firstly, we acknowledge that Universal Music Group has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 15% which is quite remarkable. This likely paved the way for the modest 12% net income growth seen by Universal Music Group over the past five years.

As a next step, we compared Universal Music Group's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 11% in the same period.

past-earnings-growth — ENXTAM:UMG Past Earnings Growth May 15th 2025

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is UMG worth today? The intrinsic value infographic in our free research report helps visualize whether UMG is currently mispriced by the market.

Is Universal Music Group Making Efficient Use Of Its Profits?

Universal Music Group has a significant three-year median payout ratio of 79%, meaning that it is left with only 21% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Besides, Universal Music Group has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 52% over the next three years. Still forecasts suggest that Universal Music Group's future ROE will drop to 33% even though the the company's payout ratio is expected to decrease. This suggests that there could be other factors could driving the anticipated decline in the company's ROE.

Conclusion

In total, we are pretty happy with Universal Music Group's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.