UPM-Kymmene Oyj (HEL: UPM) stock is up but finances look weak: Should shareholders be worried?

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UPM-Kymmene Oyj (HEL: UPM) stock is up 4.4% over the past month. However, its weak financial performance indicators make us somewhat doubt the continuation of this trend. In particular, we will pay special attention to the ROE of UPM-Kymmene Oyj today.

Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.

Check out our latest review for UPM-Kymmene Oyj

How do you 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 above formula, the ROE for UPM-Kymmene Oyj is:

6.5% = 603 million euros ÷ 9.3 billion euros (based on the last twelve months to March 2021).

The “return” is the income the business has earned over the past year. This therefore means that for 1 € investment by its shareholder, the company generates a profit of 0.06 €.

What does ROE have to do with profit growth?

So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics. .

A side-by-side comparison of UPM-Kymmene Oyj’s 6.5% profit growth and ROE

At first glance, the ROE of UPM-Kymmene Oyj is not much to say. Still, further study shows that the company’s ROE is similar to the industry average of 7.4%. But UPM-Kymmene Oyj has recorded a five-year net profit decline of 2.5% over the past five years. Remember that the company’s ROE is a bit low to begin with. Therefore, this partly explains the drop in income.

That being said, we compared UPM-Kymmene Oyj’s performance to that of the industry and we were concerned that although the company reduced its profits, the industry increased its profits at a rate 6.3% over the same period.

HLSE: UPM Past Profit Growth July 19, 2021

Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. If you are wondering about the valuation of UPM-Kymmene Oyj’s, check out this gauge of its price / earnings ratio, relative to its industry.

Is UPM-Kymmene Oyj effectively reinvesting its profits?

With a high three-year median payout rate of 59% (implying that 41% of profits are retained), most of UPM-Kymmene Oyj’s profits go to shareholders, which explains the decline in company profits. . With very little to reinvest in the business, earnings growth is far from likely.

In addition, UPM-Kymmene Oyj has paid dividends over a period of at least ten years, suggesting that sustaining dividend payments is much more important to management, even if it comes at the expense of corporate growth. the company. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 66%. Still, forecasts suggest that UPM-Kymmene Oyj’s future ROE will increase to 12% even though the company’s payout ratio is not expected to change much.

summary

Overall, the performance of UPM-Kymmene Oyj is quite disappointing. Because the company does not reinvest much in the business and given the low ROE, it is not surprising to see the absence or absence of profit growth. That said, looking at current analysts’ estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.

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