Is Weakness In AIXTRON SE (ETR:AIXA) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

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

Mon, Feb 3, 2025, 6:23 AM 4 min read

It is hard to get excited after looking at AIXTRON's (ETR:AIXA) recent performance, when its stock has declined 11% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to AIXTRON'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for AIXTRON

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 AIXTRON is:

15% = €115m ÷ €790m (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.15 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

AIXTRON's Earnings Growth And 15% ROE

To begin with, AIXTRON seems to have a respectable ROE. Even when compared to the industry average of 13% the company's ROE looks quite decent. Consequently, this likely laid the ground for the impressive net income growth of 32% seen over the past five years by AIXTRON. However, there could also be other drivers behind this growth. Such as - high earnings retention or an efficient management in place.

We then performed a comparison between AIXTRON's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 37% in the same 5-year period.

past-earnings-growth — XTRA:AIXA Past Earnings Growth February 3rd 2025

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. What is AIXA worth today? The intrinsic value infographic in our free research report helps visualize whether AIXA is currently mispriced by the market.

Is AIXTRON Making Efficient Use Of Its Profits?

The three-year median payout ratio for AIXTRON is 32%, which is moderately low. The company is retaining the remaining 68%. By the looks of it, the dividend is well covered and AIXTRON is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, AIXTRON is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 29%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 14%.

Conclusion

On the whole, we feel that AIXTRON's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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.