Stemmer Imaging AG's (ETR:S9I) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

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

Tue, Mar 26, 2024, 1:06 AM 3 min read

Most readers would already be aware that Stemmer Imaging's (ETR:S9I) stock increased significantly by 15% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Stemmer Imaging's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Stemmer Imaging

How To Calculate Return On Equity?

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 Stemmer Imaging is:

24% = €18m ÷ €76m (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.24.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Stemmer Imaging's Earnings Growth And 24% ROE

To begin with, Stemmer Imaging has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 8.3% the company's ROE is quite impressive. So, the substantial 47% net income growth seen by Stemmer Imaging over the past five years isn't overly surprising.

Given that the industry shrunk its earnings at a rate of 1.0% over the last few years, the net income growth of the company is quite impressive.

past-earnings-growth — XTRA:S9I Past Earnings Growth March 26th 2024

Earnings growth is an important metric to consider when valuing a stock. 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. Is S9I fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Stemmer Imaging Using Its Retained Earnings Effectively?

Stemmer Imaging has a three-year median payout ratio of 36% (where it is retaining 64% of its income) which is not too low or not too high. So it seems that Stemmer Imaging is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Additionally, Stemmer Imaging has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 67% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Conclusion

In total, we are pretty happy with Stemmer Imaging's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.