Is KWS SAAT SE & Co. KGaA's (ETR:KWS) Latest Stock Performance Being Led By Its Strong Fundamentals?

By
Simply Wall St
Published
April 22, 2022
XTRA:KWS
Source: Shutterstock

KWS SAAT SE KGaA's (ETR:KWS) stock up by 2.2% over the past week. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on KWS SAAT SE KGaA's ROE.

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.

See our latest analysis for KWS SAAT SE KGaA

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 KWS SAAT SE KGaA is:

12% = €111m ÷ €949m (Based on the trailing twelve months to December 2021).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.12 in profit.

What Has ROE Got To Do With 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.

A Side By Side comparison of KWS SAAT SE KGaA's Earnings Growth And 12% ROE

To start with, KWS SAAT SE KGaA's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 9.8%. Despite this, KWS SAAT SE KGaA's five year net income growth was quite flat over the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

When you consider the fact that the industry earnings have shrunk at a rate of 2.2% in the same period, the company's net income growth is pretty remarkable.

past-earnings-growth
XTRA:KWS Past Earnings Growth April 22nd 2022

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). Doing so will help them establish if the stock's future looks promising or ominous. Is KWS SAAT SE KGaA fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is KWS SAAT SE KGaA Using Its Retained Earnings Effectively?

KWS SAAT SE KGaA's low three-year median payout ratio of 23% (implying that the company keeps77% of its income) should mean that the company is retaining most of its earnings to fuel its growth and this should be reflected in its growth number, but that's not the case.

In addition, KWS SAAT SE KGaA has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 22%. Accordingly, forecasts suggest that KWS SAAT SE KGaA's future ROE will be 10% which is again, similar to the current ROE.

Summary

Overall, we are quite pleased with KWS SAAT SE KGaA's performance. 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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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