Siemens Aktiengesellschaft (ETR:SIE) fundamentals look pretty solid: Could the market be wrong about the stock?

With its stock down 5.2% over the past week, it’s easy to overlook Siemens (ETR:SIE). However, the company’s fundamentals look pretty decent and long-term financials are generally in line with future market price movements. In this article, we decided to focus on the ROE of Siemens.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

Discover our latest analysis for Siemens

How to calculate return on equity?

Return on equity can be calculated using the formula:

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

So, based on the formula above, the ROE for Siemens is:

11% = €5.6 billion ÷ €49 billion (based on the last twelve months until September 2021).

The “yield” is the profit of the last twelve months. Another way to think about this is that for every $1 of equity, the company was able to make a profit of $0.11.

What does ROE have to do with earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

Siemens earnings growth and ROE of 11%

At first glance, Siemens seems to have a decent ROE. Additionally, the company’s ROE compares quite favorably to the industry average of 5.9%. Needless to say, we’re quite surprised to see Siemens’ net profit down 6.4% over the past five years. We believe there could be other factors at play here that are preventing the company from growing. These include poor revenue retention or poor capital allocation.

Next, we compared Siemens’ performance to that of the industry and found that the industry reduced its profits by 11% over the same period, suggesting that the company’s profits declined to a slower pace than its industry. While it’s not particularly good, it’s not particularly bad either.

XTRA: SIE Past Earnings Growth January 20, 2022

Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. What is SIE worth today? The intrinsic value infographic in our free research report helps visualize whether SIE is currently being mispriced by the market.

Is Siemens using its profits efficiently?

With a high three-year median payout ratio of 68% (implying that 32% of profits are retained), most of Siemens’ profits are paid out to shareholders, which explains the company’s declining profits. With only a small portion reinvested in the business, earnings growth would obviously be weak or non-existent.

Additionally, Siemens has been paying dividends for at least a decade or more, suggesting that management must have perceived that shareholders preferred dividends to earnings growth. Our latest analyst data shows that the company’s future payout ratio is expected to drop to 47% over the next three years. The fact that the company’s ROE is expected to be 14% over the same period is explained by the drop in the payout ratio.

Summary

Overall, we think Siemens certainly has some positives to consider. However, although the company has a high ROE, its earnings growth figure is quite disappointing. This can be attributed to the fact that it only reinvests a small portion of its profits and pays out the rest as dividends. That said, we have studied the latest analyst forecasts and found that although the company has decreased earnings in the past, analysts expect earnings to increase in the future. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

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.

About Meredith Campagna

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