Is Siemens Healthineers AG's (ETR:SHL) Recent Stock Performance Influenced By Its Financials In Any Way?
Siemens Healthineers' (ETR:SHL) stock up by 4.8% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Particularly, we will be paying attention to Siemens Healthineers' ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Siemens Healthineers
How To Calculate Return On Equity?
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 Siemens Healthineers is:
8.6% = €1.5b ÷ €18b (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.09 in profit.
Why Is ROE Important For 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.
Siemens Healthineers' Earnings Growth And 8.6% ROE
To begin with, Siemens Healthineers seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 8.3%. Despite the modest returns, Siemens Healthineers' five year net income growth was quite low, averaging at only 4.3%. A few likely reasons that could be keeping earnings growth low are - the company has a high payout ratio or the business has allocated capital poorly, for instance.
As a next step, we compared Siemens Healthineers' 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 4.3% in the same period.
Earnings growth is a huge factor in stock valuation. 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. Is SHL fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Siemens Healthineers Using Its Retained Earnings Effectively?
With a high three-year median payout ratio of 53% (or a retention ratio of 47%), most of Siemens Healthineers' profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.
Additionally, Siemens Healthineers has paid dividends over a period of five years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 50% of its profits over the next three years. Regardless, the future ROE for Siemens Healthineers is predicted to rise to 16% despite there being not much change expected in its payout ratio.
Conclusion
On the whole, we do feel that Siemens Healthineers has some positive attributes. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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.
