Declining Stock and Solid Fundamentals: Is The Market Wrong About KION GROUP AG (ETR:KGX)?

By
Simply Wall St
Published
February 21, 2022
XTRA:KGX
Source: Shutterstock

It is hard to get excited after looking at KION GROUP's (ETR:KGX) recent performance, when its stock has declined 21% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study KION GROUP's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for KION GROUP

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 KION GROUP is:

10% = €509m ÷ €5.0b (Based on the trailing twelve months to September 2021).

The 'return' is the profit over the last twelve months. That means that for every €1 worth of shareholders' equity, the company generated €0.10 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

KION GROUP's Earnings Growth And 10% ROE

To start with, KION GROUP's ROE looks acceptable. Even when compared to the industry average of 9.3% the company's ROE looks quite decent. KION GROUP's decent returns aren't reflected in KION GROUP'smediocre five year net income growth average of 4.8%. We reckon that a low growth, when returns are moderate could be the result of certain circumstances like low earnings retention or poor allocation of capital.

When you consider the fact that the industry earnings have shrunk at a rate of 7.5% in the same period, the company's net income growth is pretty remarkable.

past-earnings-growth
XTRA:KGX Past Earnings Growth February 21st 2022

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. What is KGX worth today? The intrinsic value infographic in our free research report helps visualize whether KGX is currently mispriced by the market.

Is KION GROUP Efficiently Re-investing Its Profits?

KION GROUP's low three-year median payout ratio of 18% (or a retention ratio of 82%) should mean that the company is retaining most of its earnings to fuel its growth. This should be reflected in its earnings growth number, but that's not the case. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, KION GROUP has been paying dividends over a period of eight years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 30% over the next three years. Regardless, the future ROE for KION GROUP is speculated to rise to 15% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Summary

On the whole, we feel that KION GROUP's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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 company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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