Schneider Electric SE (EPA:SU) stock has shown weakness lately, but the financial outlook looks ok: is the market wrong?

It’s hard to get excited after watching Schneider Electric’s (EPA:SU) recent performance, as its stock is down 6.9% in the past month. However, the company’s fundamentals look pretty decent and long-term financials are generally in line with future market price movements. Specifically, we decided to study Schneider Electric’s ROE in this article.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Discover our latest analysis for Schneider Electric

How is ROE calculated?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, Schneider Electric’s ROE is:

11% = €3.2 billion ÷ €30 billion (based on the last twelve months until June 2022).

“Yield” is the income the business has earned over the past year. This therefore means that for each €1 of investment by its shareholder, the company generates a profit of €0.11.

Why is ROE important for earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

Profit growth and ROE of 11% for Schneider Electric

For starters, Schneider Electric seems to have a respectable ROE. Still, the fact that the company’s ROE is 15% below the industry average tempers our expectations. Schneider Electric still recorded a decent growth in its net profit of 8.0% over the past five years. Thus, there could be other aspects that positively influence earnings growth. For example, the business has a low payout ratio or is efficiently managed. However, it’s worth remembering that the company has a decent ROE to start with, just that it’s below the industry average. So this also provides some context for the earnings growth the company is seeing.

Then, comparing with the net income growth of the sector, we found that Schneider Electric’s growth is quite high compared to the sector’s average growth of 6.4% over the same period, which is great to see.

ENXTPA:SU Past Earnings Growth September 30, 2022

Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. What is SU worth today? The intrinsic value infographic in our free research report visualizes whether the SU is currently being mispriced by the market.

Is Schneider Electric using its profits efficiently?

Schneider Electric has a large three-year median payout ratio of 57%, which means it only has 43% left to reinvest in its business. This implies that the company was able to achieve decent earnings growth despite returning most of its earnings to shareholders.

Additionally, Schneider Electric has paid dividends over a period of at least ten years, which means the company is pretty serious about sharing its profits with its shareholders. 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 45%. Still, forecasts suggest Schneider Electric’s future ROE will rise to 16%, even though the company’s payout ratio isn’t expected to change much.

Conclusion

Overall, we believe that Schneider Electric has positive strengths. Specifically, its respectable ROE which likely led to the considerable earnings growth. Yet the company retains a small portion of its profits. Which means the company was able to increase its profits despite this, so it’s not that bad. We also studied the latest analyst forecasts and found that the company’s earnings growth is expected to be similar to its current growth rate. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

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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