Are Strong Financials Guiding The Market?
Bachem Holding (VTX:BANB) has had a great run on the share market with its stock up by a significant 33% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Bachem Holding’s ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
Check out our latest analysis for Bachem Holding
How To Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Bachem Holding is:
8.5% = CHF112m ÷ CHF1.3b (Based on the trailing twelve months to December 2023).
The ‘return’ refers to a company’s earnings over the last year. So, this means that for every CHF1 of its shareholder’s investments, the company generates a profit of CHF0.08.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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.
Bachem Holding’s Earnings Growth And 8.5% ROE
At first glance, Bachem Holding seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 9.1%. Consequently, this likely laid the ground for the decent growth of 17% seen over the past five years by Bachem Holding.
As a next step, we compared Bachem Holding’s net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 19% in the same period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Bachem Holding fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Bachem Holding Efficiently Re-investing Its Profits?
While Bachem Holding has a three-year median payout ratio of 52% (which means it retains 48% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn’t hampered its ability to grow.
Besides, Bachem Holding has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 43% of its profits over the next three years. Still, forecasts suggest that Bachem Holding’s future ROE will rise to 13% even though the the company’s payout ratio is not expected to change by much.
Summary
In total, we are pretty happy with Bachem Holding’s performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that’s probably a good sign. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
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.
