Should You Be Concerned With Smith & Nephew plc’s (LON:SN.) -17% Earnings Drop?

Today I will take a look at Smith & Nephew plc’s (LON:SN.) most recent earnings update (30 June 2018) and compare these latest figures against its performance over the past few years, as well as how the rest of the medical equipment industry performed. As an investor, I find it beneficial to assess SN.’s trend over the short-to-medium term in order to gauge whether or not the company is able to meet its goals, and ultimately sustainably grow over time.

Check out our latest analysis for Smith & Nephew

Commentary On SN.’s Past Performance

SN.’s trailing twelve-month earnings (from 30 June 2018) of US$717m has declined by -17% compared to the previous year.

Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of 10%, indicating the rate at which SN. is growing has slowed down. Why could this be happening? Well, let’s look at what’s occurring with margins and whether the whole industry is feeling the heat.

More

In terms of returns from investment, Smith & Nephew has fallen short of achieving a 20% return on equity (ROE), recording 15% instead. However, its return on assets (ROA) of 10.0% exceeds the GB Medical Equipment industry of 9.0%, indicating Smith & Nephew has used its assets more efficiently. Though, its return on capital (ROC), which also accounts for Smith & Nephew’s debt level, has declined over the past 3 years from 16% to 13%. This correlates with an increase in debt holding, with debt-to-equity ratio rising from 9.8% to 32% over the past 5 years.

What does this mean?

Smith & Nephew’s track record can be a valuable insight into its earnings performance, but it certainly doesn’t tell the whole story. Companies that are profitable, but have capricious earnings, can have many factors influencing its business. I recommend you continue to research Smith & Nephew to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for SN.’s future growth? Take a look at our free research report of analyst consensus for SN.’s outlook.
2. Financial Health: Are SN.’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2018. This may not be consistent with full year annual report figures.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at [email protected].