Is Weakness In Linde plc (NASDAQ:LIN) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

Simply Wall St · 04/07 12:03

Linde (NASDAQ:LIN) has had a rough month with its share price down 6.6%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Linde's ROE today.

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.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

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

17% = US$6.7b ÷ US$39b (Based on the trailing twelve months to December 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.17 in profit.

Check out our latest analysis for Linde

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Linde's Earnings Growth And 17% ROE

To start with, Linde's ROE looks acceptable. Especially when compared to the industry average of 9.9% the company's ROE looks pretty impressive. This probably laid the ground for Linde's significant 24% net income growth seen over the past five years. We reckon that there could also be other factors at play here. 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.

As a next step, we compared Linde's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.3%.

past-earnings-growth
NasdaqGS:LIN Past Earnings Growth April 7th 2025

Earnings growth is an important metric to consider when valuing a stock. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Linde is trading on a high P/E or a low P/E , relative to its industry.

Is Linde Efficiently Re-investing Its Profits?

Linde's three-year median payout ratio is a pretty moderate 42%, meaning the company retains 58% of its income. By the looks of it, the dividend is well covered and Linde is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Linde has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 34%. Regardless, the future ROE for Linde is predicted to rise to 23% despite there being not much change expected in its payout ratio.

Summary

Overall, we are quite pleased with Linde's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.