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Schneider Electric S.E.’s (EPA:SU) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Schneider Electric (EPA:SU) has had a rough three months with its share price down 15%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Schneider Electric’s ROE.

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. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

Check out our latest analysis for Schneider Electric

How Do You 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 Schneider Electric is:

12% = €3.3b ÷ €28b (Based on the trailing twelve months to December 2021).

The ‘return’ is the profit over the last twelve months. One way to conceptualize this is that for each €1 of shareholders’ capital it has, the company made €0.12 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Schneider Electric’s Earnings Growth And 12% ROE

To start with, Schneider Electric’s ROE looks acceptable. Yet, the fact that the company’s ROE is lower than the industry average of 16% does temper our expectations. Schneider Electric was still able to see a decent net income growth of 7.6% over the past five years. So, there might be other aspects that are positively influencing earnings growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this also provides some context to the earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that Schneider Electric’s growth is quite high when compared to the industry average growth of 4.5% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. What is SU worth today? The intrinsic value infographic in our free research report helps visualize whether SU is currently mispriced by the market.

Is Schneider Electric Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 57% (or a retention ratio of 43%) for Schneider Electric suggests that the company’s growth wasn’t really hampered despite it returning most of its income to its shareholders.

Moreover, Schneider Electric is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to drop to 42% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company’s ROE to 16%, over the same period.

Summary

On the whole, we do feel that Schneider Electric has some positive attributes. Specifically, its respectable ROE which likely led to the considerable growth in earnings. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that’s not too bad. Having said that, looking at the current analyst estimates, we found that the company’s earnings are expected to gain momentum. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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