With its stock down 2.4% over the past week, it is easy to disregard STMicroelectronics (EPA:STMPA). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study STMicroelectronics’ ROE in this article.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for STMicroelectronics
How Is ROE Calculated?
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 STMicroelectronics is:
25% = US$4.2b ÷ US$17b (Based on the trailing twelve months to December 2023).
The ‘return’ is the income the business earned over the last year. So, this means that for every €1 of its shareholder’s investments, the company generates a profit of €0.25.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or “retains”, and how effectively 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 higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
STMicroelectronics’ Earnings Growth And 25% ROE
To begin with, STMicroelectronics has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 15% also doesn’t go unnoticed by us. Under the circumstances, STMicroelectronics’ considerable five year net income growth of 34% was to be expected.
As a next step, we compared STMicroelectronics’ 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 34% in the same period.
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. Is STMPA fairly valued? This infographic on the company’s intrinsic value has everything you need to know.
Is STMicroelectronics Using Its Retained Earnings Effectively?
STMicroelectronics’ ‘ three-year median payout ratio is on the lower side at 8.5% implying that it is retaining a higher percentage (91%) of its profits. So it looks like STMicroelectronics is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Additionally, STMicroelectronics has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Existing analyst estimates suggest that the company’s future payout ratio is expected to drop to 6.4% over the next three years. Still forecasts suggest that STMicroelectronics’ future ROE will drop to 19% even though the the company’s payout ratio is expected to decrease. This suggests that there could be other factors could driving the anticipated decline in the company’s ROE.
Conclusion
In total, we are pretty happy with STMicroelectronics’ performance. In particular, it’s great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.
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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.
