With its stock down 6.3% in the past three months, it’s easy to overlook LANXESS (ETR: LXS). But if you pay close attention to it, you might understand that its strong financial data could mean that the stock could potentially see its value rise in the long run, given how the markets typically reward companies with good health. financial. In this article, we have decided to focus on LANXESS ROE.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest review for LANXESS
How to calculate return on equity?
the formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE of LANXESS is:
27% = 909 million euros ÷ 3.3 billion euros (based on the last twelve months up to March 2021).
“Return” refers to a company’s profits over the past year. Another way to look at this is that for every $ 1 in equity, the company was able to make $ 0.27 in profit.
What is the relationship between ROE and 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 remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
A side-by-side comparison of LANXESS profit growth and 27% ROE
For starters, LANXESS has a fairly high ROE which is interesting. Second, a comparison with the industry-reported average ROE of 13% doesn’t go unnoticed for us either. As a result, the exceptional growth of 46% in LANXESS’s net profit observed over the past five years is no surprise.
Then, comparing with the industry net income growth, we found that the growth figure reported by LANXESS compares quite favorably with the industry average, which shows a decline of 5.3% over the course of the same period.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. Has the market assessed the future prospects of LXS? You can find out in our latest Intrinsic Value infographic research report.
Is LANXESS Using Its Retained Earnings Effectively?
The three-year median payout ratio for LANXESS is 33%, which is moderately low. The company retains the remaining 67%. At first glance, the dividend is well hedged and LANXESS reinvests its profits efficiently as evidenced by its exceptional growth which we discussed above.
In addition, LANXESS has paid dividends over a period of at least ten years, which means the company is very serious about sharing its profits with its shareholders. After studying the latest consensus data from analysts, we found that the company is expected to continue to pay out around 28% of its profits over the next three years. Still, forecasts suggest that LANXESS’s future ROE will drop to 13% even though the company’s payout ratio is unlikely to change much.
All in all, we are quite satisfied with the performance of LANXESS. In particular, we like the fact that the company is reinvesting heavily in its business and at a high rate of return. Unsurprisingly, this led to impressive profit growth. That said, the company’s earnings growth is expected to slow, as current analyst estimates predict. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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