Chocoladefabriken Lindt & Sprüngli's (VTX:LISN) stock up by 8.0% 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. In this article, we decided to focus on Chocoladefabriken Lindt & Sprüngli's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Chocoladefabriken Lindt & Sprüngli

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

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

13% = CHF570m ÷ CHF4.4b (Based on the trailing twelve months to December 2022).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CHF1 worth of equity, the company was able to earn CHF0.13 in profit.

Why Is ROE Important For Earnings 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 "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Chocoladefabriken Lindt & Sprüngli's Earnings Growth And 13% ROE

At first glance, Chocoladefabriken Lindt & Sprüngli seems to have a decent ROE. Even when compared to the industry average of 13% the company's ROE looks quite decent. However, we are curious as to how Chocoladefabriken Lindt & Sprüngli's decent returns still resulted in flat growth for Chocoladefabriken Lindt & Sprüngli in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

We then compared Chocoladefabriken Lindt & Sprüngli's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 3.2% in the same period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Chocoladefabriken Lindt & Sprüngli's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Chocoladefabriken Lindt & Sprüngli Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 56% (meaning, the company retains only 44% of profits) for Chocoladefabriken Lindt & Sprüngli suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

In addition, Chocoladefabriken Lindt & Sprüngli has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 52% of its profits over the next three years. Regardless, the future ROE for Chocoladefabriken Lindt & Sprüngli is predicted to rise to 16% despite there being not much change expected in its payout ratio.

Conclusion

In total, it does look like Chocoladefabriken Lindt & Sprüngli has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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.

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