L’Air Liquide (EPA:AI) stock is up 12% in the past three months. As most know, fundamentals are what generally guide market price movements over the long term, so we decided to take a look at key financial indicators in business today to see if they have a role to play. play in the recent price movement. In concrete terms, we have chosen to study the ROE of L’Air Liquide in this article.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.
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How do you calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of L’Air Liquide is:
12% = €2.8 billion ÷ €24 billion (based on the last twelve months until June 2022).
The “return” is the annual profit. One way to conceptualize this is that for every €1 of share capital it has, the company has made a profit of €0.12.
What is the relationship between ROE and earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
Growth in Air Liquide results and 12% ROE
At first glance, L’Air Liquide seems to have a decent ROE. And comparing with the industry, we found that the industry average ROE is similar at 9.8%. Despite a moderate return on equity, L’Air Liquide has recorded net income growth of 4.8% over the past five years. We believe that low growth, when returns are moderate, could be the result of certain circumstances such as low earnings retention or poor capital allocation.
Then, comparing with the sector’s net income growth, we found that L’Air Liquide’s reported growth was lower than the sector’s growth of 8.8% over the same period, which we don’t like. no see.
Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps them determine whether the action is placed for a bright or bleak future. If you are wondering about the valuation of L’Air Liquide, check out this indicator of its price/earnings ratio, relative to its sector of activity.
Is Air Liquide using its profits efficiently?
Air Liquide has a three-year median payout ratio of 53% (implying that it only retains 47% of its earnings), which means that it pays out most of its earnings to shareholders in the form of dividends, and as a result, the company experienced weak earnings growth.
Moreover, L’Air Liquide has been paying dividends for at least ten years or more, which suggests that management must have perceived that shareholders preferred dividends to earnings growth. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to remain stable at 47%. Either way, L’Air Liquide’s future ROE is expected to increase to 15% despite the expected little change in its payout ratio.
All in all, it seems that L’Air Liquide has some positive aspects to its business. However, although the company has a high ROE, its earnings growth figure is quite disappointing. This can be attributed to the fact that it only reinvests a small portion of its profits and pays out the rest as dividends. That said, the latest analyst forecasts show that the company will continue to see earnings expansion. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization 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 only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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