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Is the recent performance of Intershop Holding AG (VTX:ISN) linked to its attractive financial outlook?
Most readers already know that Intershop Holding (VTX:ISN) shares are up 1.5% over the past three months. Given that the market rewards strong financials over the long term, we wonder if that will be the case in this case. Specifically, we decided to study Intershop Holdings ROE in this article.
Return on equity or ROE is a fundamental measure used to evaluate how efficiently a company’s management is utilizing the company’s capital. Simply put, it is used to evaluate the profitability of a company in relation to its share capital.
See our latest analysis for Intershop Holding
How to calculate return on equity?
ROE can be calculated using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Equity
Therefore, based on the above formula, Intershop Holding’s ROE is:
9.5% = CHF83 million ÷ CHF867 million (based on trailing twelve months to December 2023).
The ‘return’ refers to a company’s profits over the last year. So, this means that for every CHF1 of investment by its shareholders, the company generates a profit of CHF0.10.
What is the relationship between ROE and earnings growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we will then be able to assess a company’s earnings growth potential. Assuming everything else is equal, companies that have a higher return on equity and higher profit retention are generally those that have a higher growth rate when compared to companies that do not have the same characteristics.
Intershop Holding earnings growth and ROE of 9.5%
For starters, Intershop Holding’s ROE looks acceptable. Compared to the industry average ROE of 2.6%, the company’s ROE looks quite remarkable. This certainly adds some context to Intershop Holding’s decent 8.2% net profit growth seen over the last five years.
Given that the industry has reduced its profits at a rate of 7.0% in recent years, the company’s net profit growth is quite impressive.
past profit growth
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is whether the expected earnings growth, or lack thereof, is already factored into the stock price. By doing so, they will get an idea of whether the stock is headed for clear blue waters or if swampy waters await. If you’re wondering about Intershop Holding’s valuation, check out this indicator of your price/earnings ratiocompared to your industry.
The story continues
Is Intershop Holding using its retained earnings effectively?
Intershop Holding has a three-year average payout ratio of 34%, which implies it retains the remaining 66% of its profits. This suggests that its dividends are well covered, and given the decent growth seen by the company, it appears that management is reinvesting its profits efficiently.
Furthermore, Intershop 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. Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to increase to 95% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company’s expected ROE (to 6.5%) over the same period.
Conclusion
Overall, we feel that Intershop Holding’s performance has been quite good. Particularly, we like that the company is reinvesting heavily in its business and with a high rate of return. Unsurprisingly, this has led to impressive profit growth. Therefore, according to the latest forecasts from industry analysts, the company’s profits are expected to decline in the future. Are these analysts’ expectations based on general expectations for the industry or on the company’s fundamentals? Click here to be directed to our analysts’ forecast page for the company.
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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 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 into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St has no position in any of the stocks mentioned.