Declining stocks and decent financials: Is the market wrong on Chocoladefabriken Lindt & Sprüngli AG (VTX: LISN)?

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It’s hard to get excited after watching the recent performance of Chocoladefabriken Lindt & Sprüngli (VTX:LISN), as its stock is down 7.0% in the past three months. But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In this article, we decided to focus on the ROE of Chocoladefabriken Lindt & Sprüngli.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

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How to calculate return on equity?

The ROE formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for Chocoladefabriken Lindt & Sprüngli is:

12% = CHF 527 million ÷ CHF 4.4 billion (based on trailing 12 months to June 2022).

“Yield” refers to a company’s earnings over the past year. This means that for every CHF of equity, the company generated CHF 0.12 of profit.

Why is ROE important for earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.

A side-by-side comparison of Chocoladefabriken Lindt & Sprüngli’s earnings growth and 12% ROE

For starters, Chocoladefabriken Lindt & Sprüngli seems to have a respectable ROE. Additionally, the company’s ROE is similar to the industry average of 15%. However, we are curious to know how the decent returns of Chocoladefabriken Lindt & Sprüngli have still resulted in stable growth for Chocoladefabriken Lindt & Sprüngli over the past five years. We believe there could be other factors at play here that limit the growth of the business. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.

In a next step, we compared the growth of net income of Chocoladefabriken Lindt & Sprüngli with the industry and found that the industry recorded an average growth of 4.9% over the same period.

SWX:LISN Past Earnings Growth October 23, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. Has the market priced in LISN’s future prospects? You can find out in our latest infographic research report on intrinsic value.

Does Chocoladefabriken Lindt & Sprüngli effectively reinvest its profits?

Chocoladefabriken Lindt & Sprüngli has a high three-year median payout ratio of 56% (or a retention rate of 44%), meaning the company pays out most of its earnings as dividends to its shareholders. This partly explains why there has been no growth in its profits.

Additionally, Chocoladefabriken Lindt & Sprüngli has paid dividends over a period of at least ten years, which means the company’s management is committed to paying dividends even if it means little or no earnings growth. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to remain stable at 52%. As a result, Chocoladefabriken Lindt & Sprüngli’s ROE is not expected to change much either, which we have inferred from analysts’ estimate of 12% for future ROE.

Summary

All in all, we think that Chocoladefabriken Lindt & Sprüngli certainly has positive factors to consider. However, we are disappointed to see a lack of earnings growth, even despite high ROE. Keep in mind that the company reinvests a small portion of its profits, which means that investors do not reap the benefits of the high rate of return. That being the case, the latest forecasts from industry analysts show that analysts are expecting a huge improvement in the company’s earnings growth rate. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

Valuation is complex, but we help make it simple.

Find out if Lindt & Sprüngli chocolate factory is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

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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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