Intershop Holding (VTX: ISN) stock rose 6.1% in the past month. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics 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 Intershop Holding.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
Check out our latest review for Intershop Holding
How is the ROE calculated?
the formula for ROE is:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, the ROE for Intershop Holding is:
12% = CHF 85 million Ã· CHF 706 million (based on the last twelve months up to June 2021).
The âreturnâ is the amount earned after tax over the past twelve months. This therefore means that for each CHF1 invested by its shareholder, the company generates a profit of CHF0.12.
Why is ROE important for profit growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Based 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 other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
Growth in Intershop Holding profits and 12% ROE
For starters, Intershop Holding appears to have a respectable ROE. Especially compared to the industry average of 9.9%, the company’s ROE looks pretty impressive. This likely laid the foundation for Intershop Holding’s moderate 7.1% net profit growth seen over the past five years.
We then compared the net income growth of Intershop Holding with the industry and found that the company’s growth figure is lower than the industry average growth rate of 21% over the same period, which is a little worrying.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for a bright or dark future. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if Intershop Holding is trading high P / E or low P / E, relative to its industry.
Does Intershop Holding use its retained earnings efficiently?
Intershop Holding has a significant three-year median payout ratio of 58%, which means it only has 42% left to reinvest in its business. This implies that the company has been able to achieve decent profit growth despite returning most of its profits to shareholders.
In addition, Intershop Holding has been paying dividends for at least ten years or more. This shows that the company is committed to sharing the profits with its shareholders. After studying the latest consensus data from analysts, we found that the company’s future payout ratio is expected to reach 83% over the next three years. Thus, the expected increase in the payout ratio explains the expected decrease in the company’s ROE to 7.6%, over the same period.
Overall, we think Intershop Holding definitely has some positive factors to consider. The company increased its profits moderately, as previously reported. Nonetheless, the high ROE could have been even more beneficial for investors if the company had reinvested more of its profits. As noted earlier, the current reinvestment rate appears to be quite low. That said, studying the latest analysts’ forecast, we found that while the company has seen past earnings growth, analysts expect future earnings to decline. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.