VERBUND AG's (VIE:VER) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

With its stock down 4.9% over the past three months, it is easy to disregard VERBUND (VIE:VER). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study VERBUND's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for VERBUND

How Is ROE Calculated?

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 VERBUND is:

22% = €2.2b ÷ €10b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.22 in profit.

What Is The Relationship Between ROE And 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. 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.

A Side By Side comparison of VERBUND's Earnings Growth And 22% ROE

Firstly, we acknowledge that VERBUND has a significantly high ROE. Secondly, even when compared to the industry average of 10% the company's ROE is quite impressive. Under the circumstances, VERBUND's considerable five year net income growth of 35% was to be expected.

Next, on comparing with the industry net income growth, we found that VERBUND's growth is quite high when compared to the industry average growth of 13% 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. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about VERBUND's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is VERBUND Efficiently Re-investing Its Profits?

VERBUND's three-year median payout ratio is a pretty moderate 40%, meaning the company retains 60% of its income. So it seems that VERBUND 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, VERBUND 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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 50% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 8.7% over the same period.

Conclusion

Overall, we are quite pleased with VERBUND'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. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.