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Most readers would already be aware that Sensient Technologies' (NYSE:SXT) stock increased significantly by 13% over the past month. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. Specifically, we decided to study Sensient Technologies' ROE in this article.
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 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 Sensient Technologies
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Sensient Technologies is:
8.2% = US$89m ÷ US$1.1b (Based on the trailing twelve months to September 2024).
The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.08 in profit.
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 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.
Sensient Technologies' Earnings Growth And 8.2% ROE
At first glance, Sensient Technologies' ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 10%. On the other hand, Sensient Technologies reported a fairly low 3.1% net income growth over the past five years. Remember, the company's ROE is not particularly great to begin with. So this could also be one of the reasons behind the company's low growth in earnings.
As a next step, we compared Sensient Technologies' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 9.3% in the same 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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Sensient Technologies''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.