Are Robust Financials Driving The Recent Rally In Infineon Technologies AG's (ETR:IFX) Stock?
Infineon Technologies (ETR:IFX) has had a great run on the share market with its stock up by a significant 23% over the last month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Infineon Technologies' ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Infineon Technologies
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 Infineon Technologies is:
18% = €3.1b ÷ €17b (Based on the trailing twelve months to September 2023).
The 'return' is the profit over the last twelve months. That means that for every €1 worth of shareholders' equity, the company generated €0.18 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.
Infineon Technologies' Earnings Growth And 18% ROE
To begin with, Infineon Technologies seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 17%. Consequently, this likely laid the ground for the impressive net income growth of 30% seen over the past five years by Infineon Technologies. However, there could also be other drivers behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
As a next step, we compared Infineon Technologies' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 31% in the same period.
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 IFX worth today? The intrinsic value infographic in our free research report helps visualize whether IFX is currently mispriced by the market.
Is Infineon Technologies Efficiently Re-investing Its Profits?
Infineon Technologies has a really low three-year median payout ratio of 22%, meaning that it has the remaining 78% left over to reinvest into its business. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.
Additionally, Infineon Technologies has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 15% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.
Summary
On the whole, we feel that Infineon Technologies' 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.
