Kuehne + Nagel International AG's (VTX:KNIN) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

It is hard to get excited after looking at Kuehne + Nagel International's (VTX:KNIN) recent performance, when its stock has declined 15% over the past three months. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Kuehne + Nagel International'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Kuehne + Nagel International

How To Calculate Return On Equity?

ROE 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 Kuehne + Nagel International is:

36% = CHF1.3b ÷ CHF3.5b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CHF1 of shareholders' capital it has, the company made CHF0.36 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

A Side By Side comparison of Kuehne + Nagel International's Earnings Growth And 36% ROE

Firstly, we acknowledge that Kuehne + Nagel International has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 22% which is quite remarkable. Under the circumstances, Kuehne + Nagel International's considerable five year net income growth of 22% was to be expected.

We then compared Kuehne + Nagel International's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 51% in the same 5-year period, which is a bit concerning.

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. If you're wondering about Kuehne + Nagel International's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Kuehne + Nagel International Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 59% (implying that it keeps only 41% of profits) for Kuehne + Nagel International suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Additionally, Kuehne + Nagel International has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. 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 65%. Accordingly, forecasts suggest that Kuehne + Nagel International's future ROE will be 37% which is again, similar to the current ROE.

Summary

Overall, we feel that Kuehne + Nagel International certainly does have some positive factors to consider. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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. 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.