Flughafen Zürich’s Stock Increased by 4.5%: What Role Does ROE Play?
Most readers would already know that Flughafen Zürich’s (VTX:FHZN) stock increased by 4.5% over the past month. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company’s key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Flughafen Zürich’s ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
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 Flughafen Zürich is:
11% = CHF304m ÷ CHF2.8b (Based on the trailing twelve months to December 2023).
The ‘return’ is the income the business earned over the last year. One way to conceptualize this is that for each CHF1 of shareholders’ capital it has, the company made CHF0.11 in profit.
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
To begin with, Flughafen Zürich seems to have a respectable ROE. Further, the company’s ROE is similar to the industry average of 12%. Given the circumstances, we can’t help but wonder why Flughafen Zürich saw little to no growth in the past five years. Based on this, we feel that there might be other reasons which haven’t been discussed so far in this article that could be hampering the company’s growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
Next, on comparing with the industry net income growth, we found that Flughafen Zürich’s reported growth was a little less than the industry growth of 0.4% over the last few years.
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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Flughafen Zürich is trading on a high P/E or a low P/E, relative to its industry.
Despite having a normal three-year median payout ratio of 30% (implying that the company keeps 70% of its income) over the last three years, Flughafen Zürich has seen a negligible amount of growth in earnings as we saw above. So there could be some other explanation in that regard. For instance, the company’s business may be deteriorating.
In addition, Flughafen Zürich has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 37% over the next three years. However, the company’s ROE is not expected to change by much despite the higher expected payout ratio.
In total, it does look like Flughafen Zürich has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company’s earnings growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page 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.
