Could The Market Be Wrong About KWS SAAT SE & Co. KGaA (ETR:KWS) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at KWS SAAT SE KGaA's (ETR:KWS) recent performance, when its stock has declined 6.9% 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. In this article, we decided to focus on KWS SAAT SE KGaA's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How Do You Calculate Return On Equity?

Return on equity 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 KWS SAAT SE KGaA is:

12% = €172m ÷ €1.4b (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.12 in profit.

View our latest analysis for KWS SAAT SE KGaA

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

KWS SAAT SE KGaA's Earnings Growth And 12% ROE

To begin with, KWS SAAT SE KGaA seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 12%. Consequently, this likely laid the ground for the decent growth of 14% seen over the past five years by KWS SAAT SE KGaA.

As a next step, we compared KWS SAAT SE KGaA's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 37% 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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about KWS SAAT SE KGaA's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is KWS SAAT SE KGaA Using Its Retained Earnings Effectively?

KWS SAAT SE KGaA's three-year median payout ratio to shareholders is 24% (implying that it retains 76% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Besides, KWS SAAT SE KGaA has been paying dividends for at least ten years or more. 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 19%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 11%.

Summary

On the whole, we feel that KWS SAAT SE KGaA'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. As a result, the decent growth in its earnings is not surprising. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.