WEBULL

Is Smith & Nephew plc's (LON:SN.) Recent Performance Underpinned By Weak Financials?

Simply Wall St · 4d ago

With its stock down 6.5% over the past three months, it is easy to disregard Smith & Nephew (LON:SN.). We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Particularly, we will be paying attention to Smith & Nephew's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Smith & Nephew is:

8.9% = US$491m ÷ US$5.5b (Based on the trailing twelve months to June 2025).

The 'return' is the yearly profit. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.09.

See our latest analysis for Smith & Nephew

Why Is ROE Important For 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. 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.

Smith & Nephew's Earnings Growth And 8.9% ROE

At first glance, Smith & Nephew's ROE doesn't look very promising. However, its ROE is similar to the industry average of 8.9%, so we won't completely dismiss the company. Having said that, Smith & Nephew's five year net income decline rate was 7.1%. Remember, the company's ROE is a bit low to begin with. Hence, this goes some way in explaining the shrinking earnings.

That being said, we compared Smith & Nephew's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 14% in the same 5-year period.

past-earnings-growth
LSE:SN. Past Earnings Growth January 7th 2026

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is SN. fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Smith & Nephew Efficiently Re-investing Its Profits?

With a three-year median payout ratio as high as 107%,Smith & Nephew's shrinking earnings don't come as a surprise as the company is paying a dividend which is beyond its means. Paying a dividend higher than reported profits is not a sustainable move. You can see the 2 risks we have identified for Smith & Nephew by visiting our risks dashboard for free on our platform here.

Additionally, Smith & Nephew has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 40% over the next three years. As a result, the expected drop in Smith & Nephew's payout ratio explains the anticipated rise in the company's future ROE to 16%, over the same period.

Summary

Overall, we would be extremely cautious before making any decision on Smith & Nephew. Particularly, its ROE is a huge disappointment, not to mention its lack of proper reinvestment into the business. As a result its earnings growth has also been quite disappointing. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.