Are Robust Financials Driving The Recent Rally In VERBIO Vereinigte BioEnergie AG's (ETR:VBK) Stock?

VERBIO Vereinigte BioEnergie (ETR:VBK) has had a great run on the share market with its stock up by a significant 16% 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. In this article, we decided to focus on VERBIO Vereinigte BioEnergie's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. 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 VERBIO Vereinigte BioEnergie

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 VERBIO Vereinigte BioEnergie is:

27% = €170m ÷ €635m (Based on the trailing twelve months to December 2021).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.27 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of VERBIO Vereinigte BioEnergie's Earnings Growth And 27% ROE

Firstly, we acknowledge that VERBIO Vereinigte BioEnergie has a significantly high ROE. Secondly, even when compared to the industry average of 18% the company's ROE is quite impressive. So, the substantial 24% net income growth seen by VERBIO Vereinigte BioEnergie over the past five years isn't overly surprising.

Next, on comparing VERBIO Vereinigte BioEnergie's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 24% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 VERBIO Vereinigte BioEnergie is trading on a high P/E or a low P/E, relative to its industry.

Is VERBIO Vereinigte BioEnergie Making Efficient Use Of Its Profits?

VERBIO Vereinigte BioEnergie has a really low three-year median payout ratio of 20%, meaning that it has the remaining 80% left over to reinvest into its business. So it looks like VERBIO Vereinigte BioEnergie is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, VERBIO Vereinigte BioEnergie has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 11% over the next three years. Still forecasts suggest that VERBIO Vereinigte BioEnergie's future ROE will drop to 16% even though the the company's payout ratio is expected to decrease. This suggests that there could be other factors could driving the anticipated decline in the company's ROE.

Conclusion

On the whole, we feel that VERBIO Vereinigte BioEnergie's performance has been quite good. 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. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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. 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.