Lenzing stock (VIE: LNZ) is up 4.1% over the past month. However, we decided to study the mix of company fundamentals to assess what this might mean for future stock prices, as stock prices tend to be aligned with the long-term financial performance of a company. business. In this article, we have decided to focus on Lenzing’s ROE.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
Check out our latest analysis for Lenzing
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Lenzing is:
4.1% = 84 million euros ÷ 2.1 billion euros (based on the last twelve months up to June 2021).
The “return” is the income the business has earned over the past year. This therefore means that for 1 € of investment by its shareholder, the company generates a profit of 0.04 €.
What does ROE have to do with profit growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
Lenzing profit growth and 4.1% ROE
When you first watch it, Lenzing’s ROE doesn’t look so appealing. A quick follow-up study shows that the company’s ROE also does not compare favorably to the industry average of 13%. Therefore, it might not be wrong to say that Lenzing’s 32% five-year drop in net profit was likely the result of lower ROE. We believe there could be other factors at play here as well. For example, it is possible that the company has misallocated capital or that the company has a very high payout ratio.
That being said, we compared Lenzing’s performance to that of the industry and got worried when we found that although the company reduced its profits, the industry increased its profits at a rate of 8. , 8% over the same period.
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. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. Is LNZ valued enough? This intrinsic business value infographic has everything you need to know.
Is Lenzing Using Profits Effectively?
Although the company has paid part of its dividend in the past, it currently does not pay any dividends. This implies that potentially all of its profits are reinvested in the business.
Overall, we have mixed feelings about Lenzing. Even though it appears to be keeping the bulk of its earnings, given the low ROE, investors might not benefit from all this reinvestment after all. The weak earnings growth suggests that our theory is correct. That said, we have studied the latest analysts’ forecasts and found that while the company has cut profits in the past, analysts expect its profits to rise in the future. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
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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 shares 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 material. Simply Wall St does not have any position in the mentioned stocks.
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