Declining Stock and Solid Fundamentals: Is The Market Wrong About KWS SAAT SE & Co. KGaA (ETR:KWS)?

KWS SAAT SE KGaA (ETR:KWS) has had a rough three months with its share price down 7.2%. 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 KWS SAAT SE KGaA's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for KWS SAAT SE KGaA

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for KWS SAAT SE KGaA is:

13% = €184m ÷ €1.4b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.13 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

KWS SAAT SE KGaA's Earnings Growth And 13% ROE

To start with, KWS SAAT SE KGaA's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 14%. This probably goes some way in explaining KWS SAAT SE KGaA's moderate 10% growth over the past five years amongst other factors.

We then compared KWS SAAT SE KGaA's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 34% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is KWS SAAT SE KGaA fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is KWS SAAT SE KGaA Making Efficient Use Of Its Profits?

In KWS SAAT SE KGaA's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 24% (or a retention ratio of 76%), which suggests that the company is investing most of its profits to grow its business.

Moreover, KWS SAAT SE KGaA is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 20% of its profits over the next three years. Accordingly, forecasts suggest that KWS SAAT SE KGaA's future ROE will be 11% which is again, similar to the current ROE.

Summary

Overall, we are quite pleased with KWS SAAT SE KGaA's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.