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With its stock down 11% over the past three months, it is easy to disregard SCHOTT Pharma KGaA (ETR:1SXP). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on SCHOTT Pharma KGaA's ROE.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for SCHOTT Pharma KGaA
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for SCHOTT Pharma KGaA is:
20% = €151m ÷ €769m (Based on the trailing twelve months to June 2024).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.20.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
SCHOTT Pharma KGaA's Earnings Growth And 20% ROE
To start with, SCHOTT Pharma KGaA's ROE looks acceptable. Especially when compared to the industry average of 8.0% the company's ROE looks pretty impressive. Probably as a result of this, SCHOTT Pharma KGaA was able to see a decent growth of 15% over the last five years.
We then performed a comparison between SCHOTT Pharma KGaA's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 14% in the same 5-year period.
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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is 1SXP fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is SCHOTT Pharma KGaA Efficiently Re-investing Its Profits?
SCHOTT Pharma KGaA's three-year median payout ratio to shareholders is 15% (implying that it retains 85% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.