Declining Stock and Decent Financials: Is The Market Wrong About Mineralbrunnen Überkingen-Teinach GmbH & Co. KGaA (FRA:MUT)?

With its stock down 15% over the past week, it is easy to disregard Mineralbrunnen Überkingen-Teinach GmbH KGaA (FRA:MUT). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Mineralbrunnen Überkingen-Teinach GmbH KGaA's ROE today.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Mineralbrunnen Überkingen-Teinach GmbH KGaA

How Do You 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 Mineralbrunnen Überkingen-Teinach GmbH KGaA is:

8.9% = €6.1m ÷ €69m (Based on the trailing twelve months to December 2023).

The 'return' is the income the business earned over the last year. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.09.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Mineralbrunnen Überkingen-Teinach GmbH KGaA's Earnings Growth And 8.9% ROE

At first glance, Mineralbrunnen Überkingen-Teinach GmbH KGaA seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 7.2%. Needless to say, we are quite surprised to see that Mineralbrunnen Überkingen-Teinach GmbH KGaA's net income shrunk at a rate of 8.9% over the past five years. Therefore, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.

Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate of 0.6% over the last few years, we found that Mineralbrunnen Überkingen-Teinach GmbH KGaA's performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. 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 Mineralbrunnen Überkingen-Teinach GmbH KGaA is trading on a high P/E or a low P/E, relative to its industry.

Is Mineralbrunnen Überkingen-Teinach GmbH KGaA Making Efficient Use Of Its Profits?

Mineralbrunnen Überkingen-Teinach GmbH KGaA's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 70% (or a retention ratio of 30%). The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. You can see the 3 risks we have identified for Mineralbrunnen Überkingen-Teinach GmbH KGaA by visiting our risks dashboard for free on our platform here.

In addition, Mineralbrunnen Überkingen-Teinach GmbH 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.

Summary

Overall, we feel that Mineralbrunnen Überkingen-Teinach GmbH KGaA certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. Up till now, we've only made a short study of the company's growth data. You can do your own research on Mineralbrunnen Überkingen-Teinach GmbH KGaA and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com