Metall Zug (VTX:METN) stock is up 5.7% over the past week. Since stock prices are usually aligned with a company’s financial performance over the long term, we decided to take a closer look at its financial indicators to see if they had a role to play in the recent price movement. . In this article, we have decided to focus on the ROE of Metall Zug.
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 simple terms, it is used to assess the profitability of a company in relation to its equity.
See our latest analysis for Metall Zug
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Metall Zug is:
9.5% = CHF 48 million ÷ CHF 505 million (based on the last twelve months until December 2021).
The “yield” is the profit of the last twelve months. This means that for every CHF of equity, the company generated CHF 0.09 of profit.
What is the relationship between ROE and 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.
Metall Zug profit growth and ROE of 9.5%
For starters, Metall Zug’s ROE looks acceptable. Even when compared to the industry average of 8.9%, the company’s ROE looks pretty decent. As you might expect, the 31% drop in net income reported by Metall Zug comes as a bit of a surprise. So there could be other aspects that could explain this. For example, the company pays a large portion of its profits in the form of dividends or faces competitive pressures.
That being said, we compared Metall Zug’s performance with that of the industry and became concerned when we found that while the company had reduced profits, the industry had increased profits at a rate of 3, 8% over the same period.
Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. If you’re wondering about Metall Zug’s valuation, check out this indicator of its price-earnings ratio, relative to its sector.
Is Metall Zug effectively reinvesting its profits?
Despite a normal three-year median payout rate of 49% (i.e. a retention rate of 51%), the fact that Metall Zug’s earnings have declined is quite puzzling. It seems that there could be other reasons for the lack in this regard. For example, the business might be in decline.
Additionally, Metall Zug 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.
All in all, we think Metall Zug certainly has positive factors to consider. However, we are disappointed to see a lack of earnings growth, even despite a high ROE and high reinvestment rate. We believe there could be external factors that could negatively impact the business. While we wouldn’t completely dismiss the business, what we would do is try to figure out how risky the business is to make a more informed decision about the business. Our risk dashboard will contain the 1 risk we have identified for Metall Zug.
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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.