Most readers would already be aware that Carlsberg’s (CPH:CARL B) stock increased significantly by 16% over the past three months. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Carlsberg’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. Put another way, it reveals the company’s success at turning shareholder investments into profits.
How Is ROE Calculated?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Carlsberg is:
16% = ø7.5b ÷ ø46b (Based on the trailing twelve months to December 2019).
The ‘return’ is the income the business earned over the last year. One way to conceptualize this is that for each DKK1 of shareholders’ capital it has, the company made DKK0.16 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learnt 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
Carlsberg’s Earnings Growth And 16% ROE
At first glance, Carlsberg seems to have a decent ROE. Especially when compared to the industry average of 10% the company’s ROE looks pretty impressive. Probably as a result of this, Carlsberg was able to see an impressive net income growth of 26% over the last five years. However, there could also be other causes behind this growth. Such as – high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that Carlsberg’s growth is quite high when compared to the industry average growth of 9.3% 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. 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. Has the market priced in the future outlook for CARL B? You can find out in our latest intrinsic value infographic research report.
Is Carlsberg Using Its Retained Earnings Effectively?
The three-year median payout ratio for Carlsberg is 49%, which is moderately low. The company is retaining the remaining 51%. So it seems that Carlsberg is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that’s well covered.
Moreover, Carlsberg 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 49%. Therefore, the company’s future ROE is also not expected to change by much with analysts predicting an ROE of 16%.
Overall, we are quite pleased with Carlsberg’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. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
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This article by Simply Wall St is general in nature. 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.
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