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

Unlock stock picks and a broker-level newsfeed that powers Wall Street. Upgrade Now

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

Fri, Oct 18, 2024, 2:40 AM 4 min read

It is hard to get excited after looking at SÜSS MicroTec's (ETR:SMHN) recent performance, when its stock has declined 11% over the past week. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study SÜSS MicroTec's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for SÜSS MicroTec

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 SÜSS MicroTec is:

12% = €30m ÷ €249m (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.12.

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. 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.

SÜSS MicroTec's Earnings Growth And 12% ROE

At first glance, SÜSS MicroTec seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 14%. This probably goes some way in explaining SÜSS MicroTec's significant 49% net income growth over the past five years amongst other factors. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that SÜSS MicroTec's growth is quite high when compared to the industry average growth of 38% in the same period, which is great to see.

past-earnings-growth — XTRA:SMHN Past Earnings Growth October 18th 2024

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is SMHN worth today? The intrinsic value infographic in our free research report helps visualize whether SMHN is currently mispriced by the market.

Is SÜSS MicroTec Efficiently Re-investing Its Profits?

SÜSS MicroTec's three-year median payout ratio to shareholders is 16%, which is quite low. This implies that the company is retaining 84% of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Moreover, SÜSS MicroTec is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 15%. Regardless, the future ROE for SÜSS MicroTec is predicted to rise to 18% despite there being not much change expected in its payout ratio.

Summary

On the whole, we feel that SÜSS MicroTec's performance has been quite good. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.