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Should Smith & Nephew plc's (LON:SN.) Recent Earnings Decline Worry You?

Simply Wall St

Examining how Smith & Nephew plc (LON:SN.) is performing as a company requires looking at more than just a years' earnings. Below, I will run you through a simple sense check to build perspective on how Smith & Nephew is doing by comparing its most recent earnings with its historical trend, in addition to the performance of its medical equipment industry peers.

See our latest analysis for Smith & Nephew

Despite a decline, did SN. underperform the long-term trend and the industry?

SN.'s trailing twelve-month earnings (from 31 December 2018) of US$663m has declined by -14% compared to the previous year.

Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of 10.0%, indicating the rate at which SN. is growing has slowed down. Why is this? Well, let’s take a look at what’s transpiring with margins and whether the entire industry is experiencing the hit as well.

LSE:SN. Income Statement, July 30th 2019

In terms of returns from investment, Smith & Nephew has fallen short of achieving a 20% return on equity (ROE), recording 14% instead. Furthermore, its return on assets (ROA) of 8.9% is below the GB Medical Equipment industry of 8.9%, indicating Smith & Nephew's are utilized less efficiently. However, its return on capital (ROC), which also accounts for Smith & Nephew’s debt level, has increased over the past 3 years from 13% to 15%.

What does this mean?

While past data is useful, it doesn’t tell the whole story. Companies that are profitable, but have unpredictable earnings, can have many factors affecting its business. I recommend you continue to research Smith & Nephew to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for SN.’s future growth? Take a look at our free research report of analyst consensus for SN.’s outlook.
  2. Financial Health: Are SN.’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2018. This may not be consistent with full year annual report figures.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.