Most readers would already be aware that Schaffner Holding's (VTX:SAHN) stock increased significantly by 11% 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 Schaffner 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Schaffner Holding
How Do You 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 Schaffner Holding is:
23% = CHF17m ÷ CHF75m (Based on the trailing twelve months to March 2023).
The 'return' refers to a company's earnings over the last year. So, this means that for every CHF1 of its shareholder's investments, the company generates a profit of CHF0.23.
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. 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.
A Side By Side comparison of Schaffner Holding's Earnings Growth And 23% ROE
Firstly, we acknowledge that Schaffner Holding has a significantly high ROE. Even when compared to the industry average of 19% the company's ROE is pretty decent. However, When you compare Schaffner Holding's high ROE with its rather flat earnings, you are left wondering, what's causing the growth to lag? 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. For example, it could be that the company has a high payout ratio or the the business has allocated capital poorly, for instance.
Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 8.8% in the same period.
Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Schaffner Holding's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.