Forbo Holding AG’s (VTX:FORN) Stock’s On An Uptrend: Are Strong Financials Guiding The Market?

Most readers would already be aware that Forbo Holding’s (VTX:FORN) stock increased significantly by 14% over the past month. 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. Particularly, we will be paying attention to Forbo Holding’s ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Forbo Holding

How Is ROE Calculated?

Return on equity 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 Forbo Holding is:

26% = CHF138m ÷ CHF532m (Based on the trailing twelve months to June 2022).

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 CHF0.26.

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. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.

A Side By Side comparison of Forbo Holding’s Earnings Growth And 26% ROE

To begin with, Forbo Holding has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 12% the company’s ROE is quite impressive. This probably laid the groundwork for Forbo Holding’s moderate 13% net income growth seen over the past five years.

We then compared Forbo Holding’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 8.8% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. Is FORN fairly valued? This infographic on the company’s intrinsic value has everything you need to know.

Is Forbo Holding Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 27% (implying that the company retains 73% of its profits), it seems that Forbo Holding is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that’s well covered.

Moreover, Forbo Holding is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 29%. As a result, Forbo Holding’s ROE is not expected to change by much either, which we inferred from the analyst estimate of 21% for future ROE.

Summary

Overall, we are quite pleased with Forbo Holding’s performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.