Are Strong Financial Prospects The Force That Is Driving The Momentum In HELLA GmbH & Co. KGaA's ETR:HLE) Stock?

By
Simply Wall St
Published
June 19, 2020

HELLA GmbH KGaA (ETR:HLE) has had a great run on the share market with its stock up by a significant 60% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study HELLA GmbH KGaA's ROE in this article.

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 HELLA GmbH KGaA

How Is ROE Calculated?

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 HELLA GmbH KGaA is:

12% = €334m ÷ €2.8b (Based on the trailing twelve months to February 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.12 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learnt that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

HELLA GmbH KGaA's Earnings Growth And 12% ROE

To begin with, HELLA GmbH KGaA seems to have a respectable ROE. Especially when compared to the industry average of 6.8% the company's ROE looks pretty impressive. Probably as a result of this, HELLA GmbH KGaA was able to see a decent growth of 15% over the last five years.

When you consider the fact that the industry earnings have shrunk at a rate of 5.6% in the same period, the company's net income growth is pretty remarkable.

XTRA:HLE Past Earnings Growth June 19th 2020

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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if HELLA GmbH KGaA is trading on a high P/E or a low P/E, relative to its industry.

Is HELLA GmbH KGaA Efficiently Re-investing Its Profits?

HELLA GmbH KGaA has a three-year median payout ratio of 28%, which implies that it retains the remaining 72% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Besides, HELLA GmbH KGaA has been paying dividends over a period of five years. 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 33%. As a result, HELLA GmbH KGaA's ROE is not expected to change by much either, which we inferred from the analyst estimate of 11% for future ROE.

Summary

Overall, we are quite pleased with HELLA GmbH KGaA'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, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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. 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. Thank you for reading.

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