SHW AG’s (FRA:SW1) Earnings Dropped -20.66%, How Did It Fare Against The Industry?

After reading SHW AG’s (FRA:SW1) most recent earnings announcement (31 December 2017), I found it useful to look back at how the company has performed in the past and compare this against the latest numbers. As a long term investor, I pay close attention to earnings trend, rather than the figures published at one point in time. I also compare against an industry benchmark to check whether SHW’s performance has been impacted by industry movements. In this article I briefly touch on my key findings. Check out our latest analysis for SHW

Was SW1’s weak performance lately a part of a long-term decline?

SW1’s trailing twelve-month earnings (from 31 December 2017) of €10.16m has declined by -20.66% 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 -5.19%, indicating the rate at which SW1 is growing has slowed down. Why could this be happening? Let’s examine what’s going on with margins and whether the entire industry is experiencing the hit as well.

Revenue growth over the last couple of years, has been positive, yet earnings growth has been falling. This implies that SHW has been increasing expenses, which is harming margins and earnings, and is not a sustainable practice. Viewing growth from a sector-level, the DE auto components industry has been growing, albeit, at a muted single-digit rate of 5.48% in the prior year, and 7.88% over the past half a decade. This suggests that any tailwind the industry is deriving benefit from, SHW has not been able to gain as much as its average peer.

DB:SW1 Income Statement June 27th 18
DB:SW1 Income Statement June 27th 18
In terms of returns from investment, SHW has not invested its equity funds well, leading to a 8.13% return on equity (ROE), below the sensible minimum of 20%. Furthermore, its return on assets (ROA) of 4.27% is below the DE Auto Components industry of 5.44%, indicating SHW’s are utilized less efficiently. And finally, its return on capital (ROC), which also accounts for SHW’s debt level, has declined over the past 3 years from 16.75% to 9.55%. This correlates with an increase in debt holding, with debt-to-equity ratio rising from 0.047% to 18.95% over the past 5 years.

What does this mean?

Though SHW’s past data is helpful, it is only one aspect of my investment thesis. Generally companies that face a prolonged period of reduction in earnings are undergoing some sort of reinvestment phase with the aim of keeping up with the latest industry disruption and expansion. I recommend you continue to research SHW to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for SW1’s future growth? Take a look at our free research report of analyst consensus for SW1’s outlook.
  2. Financial Health: Is SW1’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 31 December 2017. This may not be consistent with full year annual report figures.