INFICON Holding AG's (VTX:IFCN) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

Simply Wall St · 10/16 04:03

INFICON Holding (VTX:IFCN) has had a rough three months with its share price down 17%. 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. In this article, we decided to focus on INFICON Holding's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for INFICON Holding

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 INFICON Holding is:

34% = US$111m ÷ US$326m (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CHF1 worth of equity, the company was able to earn CHF0.34 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

INFICON Holding's Earnings Growth And 34% ROE

Firstly, we acknowledge that INFICON Holding has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 9.4% also doesn't go unnoticed by us. This probably laid the groundwork for INFICON Holding's moderate 18% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that INFICON Holding's growth is quite high when compared to the industry average growth of 5.6% in the same period, which is great to see.

past-earnings-growth
SWX:IFCN Past Earnings Growth October 16th 2024

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for IFCN? You can find out in our latest intrinsic value infographic research report.

Is INFICON Holding Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 55% (or a retention ratio of 45%) for INFICON Holding suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, INFICON Holding has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 51%. Accordingly, forecasts suggest that INFICON Holding's future ROE will be 29% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with INFICON Holding's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.