Is Weakness In Mineralbrunnen Überkingen-Teinach GmbH & Co. KGaA (FRA:MUT) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

Mineralbrunnen Überkingen-Teinach GmbH KGaA (FRA:MUT) has had a rough week with its share price down 1.2%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Mineralbrunnen Überkingen-Teinach GmbH KGaA's ROE in this article.

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 Mineralbrunnen Überkingen-Teinach GmbH KGaA

How Is ROE Calculated?

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 Mineralbrunnen Überkingen-Teinach GmbH KGaA is:

13% = €8.2m ÷ €61m (Based on the trailing twelve months to June 2020).

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 €0.13 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Mineralbrunnen Überkingen-Teinach GmbH KGaA's Earnings Growth And 13% 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 7.0%. This certainly adds some context to Mineralbrunnen Überkingen-Teinach GmbH KGaA's exceptional 34% net income growth seen over the past five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

We then compared Mineralbrunnen Überkingen-Teinach GmbH KGaA's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 12% in the same period.

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 Using Its Retained Earnings Effectively?

The three-year median payout ratio for Mineralbrunnen Überkingen-Teinach GmbH KGaA is 36%, which is moderately low. The company is retaining the remaining 64%. By the looks of it, the dividend is well covered and Mineralbrunnen Überkingen-Teinach GmbH KGaA is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Mineralbrunnen Überkingen-Teinach GmbH KGaA is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend.

Conclusion

On the whole, we feel that Mineralbrunnen Überkingen-Teinach GmbH KGaA'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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. You can see the 2 risks we have identified for Mineralbrunnen Überkingen-Teinach GmbH KGaA by visiting our risks dashboard for free on our platform here.

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