Will Weakness in naturenergie holding AG's (VTX:NEAG) Stock Prove Temporary Given Strong Fundamentals?

It is hard to get excited after looking at naturenergie holding's (VTX:NEAG) recent performance, when its stock has declined 6.9% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to naturenergie holding'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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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 naturenergie holding is:

15% = €180m ÷ €1.2b (Based on the trailing twelve months to December 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CHF1 worth of shareholders' equity, the company generated CHF0.15 in profit.

See our latest analysis for naturenergie holding

What Has ROE Got To Do With 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.

A Side By Side comparison of naturenergie holding's Earnings Growth And 15% ROE

To begin with, naturenergie holding seems to have a respectable ROE. Especially when compared to the industry average of 9.7% the company's ROE looks pretty impressive. This probably laid the ground for naturenergie holding's significant 32% net income growth seen over the past five years. However, there could also be other causes behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared naturenergie holding's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 14% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about naturenergie holding's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is naturenergie holding Making Efficient Use Of Its Profits?

naturenergie holding's three-year median payout ratio is a pretty moderate 29%, meaning the company retains 71% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like naturenergie holding is reinvesting its earnings efficiently.

Besides, naturenergie holding has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 25%. However, naturenergie holding's future ROE is expected to decline to 11% despite there being not much change anticipated in the company's payout ratio.

Summary

Overall, we are quite pleased with naturenergie holding's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.