It is hard to get excited after looking at Logitech International’s (VTX:LOGN) recent performance, when its stock has declined 11% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Logitech International’s ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
Check out our latest analysis for Logitech International
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Logitech International is:
22% = US$486m ÷ US$2.2b (Based on the trailing twelve months to December 2023).
The ‘return’ is the amount earned after tax over the last twelve months. So, this means that for every CHF1 of its shareholder’s investments, the company generates a profit of CHF0.22.
Why Is ROE Important For Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. 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.
Logitech International’s Earnings Growth And 22% ROE
To begin with, Logitech International has a pretty high ROE which is interesting. Additionally, the company’s ROE is higher compared to the industry average of 6.5% which is quite remarkable. Probably as a result of this, Logitech International was able to see a decent net income growth of 5.5% over the last five years.
Next, on comparing with the industry net income growth, we found that the growth figure reported by Logitech International compares quite favourably to the industry average, which shows a decline of 8.0% over the last few years.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Logitech International’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Logitech International Making Efficient Use Of Its Profits?
With a three-year median payout ratio of 29% (implying that the company retains 71% of its profits), it seems that Logitech International is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that’s well covered.
Moreover, Logitech International 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. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 29%. Therefore, the company’s future ROE is also not expected to change by much with analysts predicting an ROE of 23%.
Conclusion
Overall, we are quite pleased with Logitech International’s performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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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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.
