Should Grammer AG's (FRA:GMM) Recent Earnings Worry You?

Assessing Grammer AG's (FRA:GMM) performance as a company requires looking at more than just a years' earnings data. Below, I will run you through a simple sense check to build perspective on how Grammer is doing by comparing its most recent earnings with its historical trend, in addition to the performance of its auto components industry peers.

View our latest analysis for Grammer

Was GMM weak performance lately part of a long-term decline?

GMM's trailing twelve-month earnings (from 30 June 2018) of €37.65m has declined by -14.33% compared to the previous year. Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of 7.24%, indicating the rate at which GMM is growing has slowed down. Why is this? Let's examine what's occurring with margins and if the entire industry is experiencing the hit as well.

Revenue growth over the last couple of years, has been positive, however, earnings growth has been lagging behind meaning Grammer has been growing its expenses by a lot more. This hurts margins and earnings, and is not a sustainable practice. Looking at growth from a sector-level, the DE auto components industry has been growing, albeit, at a subdued single-digit rate of 6.70% over the past twelve months, and 7.62% over the previous five years. This growth is a median of profitable companies of 22 Auto Components companies in DE including Cooper Tire & Rubber, Goodyear Tire & Rubber and VOXX International. This shows that whatever uplift the industry is deriving benefit from, Grammer has not been able to leverage it as much as its industry peers.

In terms of returns from investment, Grammer has fallen short of achieving a 20% return on equity (ROE), recording 11.76% instead. Furthermore, its return on assets (ROA) of 4.16% is below the DE Auto Components industry of 5.49%, indicating Grammer's are utilized less efficiently. However, its return on capital (ROC), which also accounts for Grammer’s debt level, has increased over the past 3 years from 7.99% to 11.46%. This correlates with a decrease in debt holding, with debt-to-equity ratio declining from 104.50% to 74.70% over the past 5 years.

What does this mean?

Grammer's track record can be a valuable insight into its earnings performance, but it certainly doesn't tell the whole story. Companies that are profitable, but have unpredictable earnings, can have many factors affecting its business. I recommend you continue to research Grammer to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for GMM’s future growth? Take a look at our free research report of analyst consensus for GMM’s outlook.
2. Financial Health: Are GMM’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2018. This may not be consistent with full year annual report figures.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.