Are Strong Financial Prospects The Force That Is Driving The Momentum In Schwälbchen Molkerei Jakob Berz AG's FRA:SMB) Stock?

Most readers would already be aware that Schwälbchen Molkerei Jakob Berz's (FRA:SMB) stock increased significantly by 14% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Schwälbchen Molkerei Jakob Berz's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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How Is ROE Calculated?

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 Schwälbchen Molkerei Jakob Berz is:

14% = €5.6m ÷ €41m (Based on the trailing twelve months to December 2024).

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 €0.14.

View our latest analysis for Schwälbchen Molkerei Jakob Berz

Why Is ROE Important For 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.

Schwälbchen Molkerei Jakob Berz's Earnings Growth And 14% ROE

At first glance, Schwälbchen Molkerei Jakob Berz seems to have a decent ROE. Especially when compared to the industry average of 10% the company's ROE looks pretty impressive. Probably as a result of this, Schwälbchen Molkerei Jakob Berz was able to see an impressive net income growth of 37% over the last five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Schwälbchen Molkerei Jakob Berz'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 17% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Schwälbchen Molkerei Jakob Berz fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Schwälbchen Molkerei Jakob Berz Making Efficient Use Of Its Profits?

Schwälbchen Molkerei Jakob Berz has a really low three-year median payout ratio of 15%, meaning that it has the remaining 85% left over to reinvest into its business. So it looks like Schwälbchen Molkerei Jakob Berz is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Schwälbchen Molkerei Jakob Berz 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.

Conclusion

In total, we are pretty happy with Schwälbchen Molkerei Jakob Berz's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard would have the 2 risks we have identified for Schwälbchen Molkerei Jakob Berz.

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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.