Most readers already know that shares of IVF Hartmann Holding (VTX:VBSN) are up a significant 12% in the past month. However, we decided to pay attention to the fundamentals of the company which do not seem to give a clear indication of the financial health of the company. In this article, we have decided to focus on the ROE of IVF Hartmann Holding.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest analysis for IVF Hartmann Holding
How do you calculate return on equity?
The ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for IVF Hartmann Holding is:
5.4% = CHF 7.4 million ÷ CHF 137 million (based on the last twelve months until June 2022).
The “yield” is the profit of the last twelve months. One way to conceptualize this is that for every CHF 1 of share capital it has, the company has made a profit of CHF 0.05.
Why is ROE important for earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
Profit growth and ROE of 5.4% of IVF Hartmann Holding
When you first look at it, IVF Hartmann Holding’s ROE doesn’t look so appealing. A quick closer look shows that the company’s ROE also doesn’t compare favorably to the industry average of 9.1%. For this reason, IVF Hartmann Holding’s 9.8% drop in five-year net profit is not surprising given its low ROE. We believe there could be other factors at play here as well. For example, it is possible that the company has misallocated capital or that the company has a very high payout ratio.
So, as a next step, we benchmarked IVF Hartmann Holding’s performance against the industry and were disappointed to find that while the company was cutting profits, the industry was increasing profits at a rate of 8.1% over the same period.
Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if IVF Hartmann Holding is trading on a high P/E or a low P/E, relative to its industry.
Does IVF Hartmann Holding effectively reinvest its profits?
Considering its three-year median payout ratio of 46% (or a 54% retention rate), which is fairly normal, IVF Hartmann Holding’s declining earnings are rather disconcerting, as we would expect to see good growth when a company retains a good portion of its profits. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.
Furthermore, IVF Hartmann Holding has paid dividends over a period of at least ten years, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of company growth. ‘company.
Overall, we believe that the performance presented by IVF Hartmann Holding is open to many interpretations. Even though it seems to keep most of its profits, given the low ROE, investors may not be benefiting from all that reinvestment after all. Weak earnings growth suggests our theory is correct. In conclusion, we would proceed with caution with this business and one way to do that would be to review the risk profile of the business. To learn about the 2 risks we have identified for IVF Hartmann Holding, visit our risk dashboard for free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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