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With its stock down 5.5% over the past month, it is easy to disregard SCHOTT Pharma KGaA (ETR:1SXP). 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. Specifically, we decided to study SCHOTT Pharma KGaA's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for SCHOTT Pharma KGaA
How Is ROE Calculated?
Return on equity 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 SCHOTT Pharma KGaA is:
22% = €158m ÷ €721m (Based on the trailing twelve months to December 2023).
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 €0.22 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. 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 SCHOTT Pharma KGaA's Earnings Growth And 22% ROE
Firstly, we acknowledge that SCHOTT Pharma KGaA has a significantly high ROE. Secondly, even when compared to the industry average of 8.5% the company's ROE is quite impressive. This likely paved the way for the modest 20% net income growth seen by SCHOTT Pharma KGaA over the past 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 19% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. 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.