AGRANA Beteiligungs-Aktiengesellschaft's (VIE:AGR) Dismal Stock Performance Reflects Weak Fundamentals

With its stock down 5.3% over the past week, it is easy to disregard AGRANA Beteiligungs-Aktiengesellschaft (VIE:AGR). Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Specifically, we decided to study AGRANA Beteiligungs-Aktiengesellschaft's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for AGRANA Beteiligungs-Aktiengesellschaft

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for AGRANA Beteiligungs-Aktiengesellschaft is:

2.0% = €25m ÷ €1.3b (Based on the trailing twelve months to February 2023).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.02 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

AGRANA Beteiligungs-Aktiengesellschaft's Earnings Growth And 2.0% ROE

It is quite clear that AGRANA Beteiligungs-Aktiengesellschaft's ROE is rather low. Not just that, even compared to the industry average of 8.6%, the company's ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 44% seen by AGRANA Beteiligungs-Aktiengesellschaft over the last five years is not surprising. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

However, when we compared AGRANA Beteiligungs-Aktiengesellschaft's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 11% in the same period. This is quite worrisome.

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. Is AGR fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is AGRANA Beteiligungs-Aktiengesellschaft Using Its Retained Earnings Effectively?

AGRANA Beteiligungs-Aktiengesellschaft's very high three-year median payout ratio of 102% over the last three years suggests that the company is paying its shareholders more than what it is earning and this explains the company's shrinking earnings. Paying a dividend higher than reported profits is not a sustainable move. To know the 2 risks we have identified for AGRANA Beteiligungs-Aktiengesellschaft visit our risks dashboard for free.

In addition, AGRANA Beteiligungs-Aktiengesellschaft has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 71% over the next three years. As a result, the expected drop in AGRANA Beteiligungs-Aktiengesellschaft's payout ratio explains the anticipated rise in the company's future ROE to 8.2%, over the same period.

Summary

In total, we would have a hard think before deciding on any investment action concerning AGRANA Beteiligungs-Aktiengesellschaft. Particularly, its ROE is a huge disappointment, not to mention its lack of proper reinvestment into the business. As a result its earnings growth has also been quite disappointing. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.