Zurich Airport (VTX:FHZN) stock has risen 3.9% over the past three months. As most people know, long-term fundamentals are highly correlated with market price movements, so today we decided to examine the company’s key financial indicators to see if they play a role in the recent price movement. Specifically, we decided to examine Zurich Airport’s return on equity in this article.
Return on equity (ROE) is a measure of how effectively a company increases its value and manages its investors’ money. In short, ROE shows the profit each dollar generates relative to its shareholders’ investments.
Check out our latest analysis of Zurich Airport
How do you calculate return on equity?
Return on equity can be calculated using the following formula:
Return on equity = Net profit (from continuing operations) ÷ Equity
Based on the above formula, the return on equity for Zurich Airport is:
11% = CHF 304 million ÷ CHF 2.8 billion (based on the last twelve months to December 2023).
The “return” is the annual profit. You can also imagine it like this: for every CHF of equity, the company was able to achieve a profit of CHF 0.11.
What is the relationship between ROE and earnings growth?
So far, we’ve learned that return on equity (ROE) measures how efficiently a company generates its profits. Based on how much of its profits the company reinvests or “retains,” we can then judge a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with high return on equity and earnings retention will have a higher growth rate than companies that don’t have these characteristics.
A comparison of profit growth and return on equity of 11% at Zurich Airport
First of all, Zurich Airport’s return on equity looks acceptable. Moreover, the company’s return on equity is in line with the industry average of 12%. Given these circumstances, we cannot help but wonder why Zurich Airport has seen little to no growth over the past five years. Based on this, we believe there could be other reasons not discussed in this article so far that could be hindering the company’s growth. For example, it could be that the company has a high payout ratio or the company has been poorly deploying its capital.
Next, when comparing the industry’s net income growth, we found that the industry’s earnings have increased by 13% over the past few years.
Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the company’s expected earnings growth (or earnings decline). This then helps them determine whether the stock is positioned for a good or bad future. Has the market priced in the future prospects for FHZN? Find out in our latest intrinsic value infographic research report.
Does Zurich Airport reinvest its profits efficiently?
Despite a normal three-year average payout ratio of 30% (meaning the company retains 70% of its earnings), Zurich Airport has seen negligible earnings growth over the past three years, as we saw above. So there could be other factors at play that could potentially hinder growth. For example, the company has faced some headwinds.
In addition, Zurich Airport has been paying dividends for at least ten years, which suggests that management must have recognized that shareholders prefer dividends to earnings growth. After examining the latest analyst consensus data, we found that the company’s future payout ratio is expected to increase to 54% over the next three years. Despite the higher expected payout ratio, the company’s return on equity is not expected to change significantly.
Diploma
Overall, we think Zurich Airport has some positive attributes. However, given the high return on equity and high profit retention, we would expect the company to deliver strong earnings growth, but that is not the case here. This suggests that there could be an external threat to the company that is hindering its growth. With this in mind, the latest industry analyst forecasts show that the analysts are expecting a huge improvement in the company’s earnings growth rate. You can find more information about the company’s future earnings growth forecasts here free Read the company’s analyst forecasts report to learn more.
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
