Is Schwälbchen Molkerei Jakob Berz AG's (FRA:SMB) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Most readers would already be aware that Schwälbchen Molkerei Jakob Berz's (FRA:SMB) stock increased significantly by 16% over the past three months. 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. Specifically, we decided to study Schwälbchen Molkerei Jakob Berz'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Schwälbchen Molkerei Jakob Berz

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 Schwälbchen Molkerei Jakob Berz is:

19% = €6.8m ÷ €37m (Based on the trailing twelve months to December 2023).

The 'return' is the profit over the last twelve months. That means that for every €1 worth of shareholders' equity, the company generated €0.19 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Schwälbchen Molkerei Jakob Berz's Earnings Growth And 19% ROE

At first glance, Schwälbchen Molkerei Jakob Berz seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 13%. This certainly adds some context to Schwälbchen Molkerei Jakob Berz's decent 15% net income growth seen over the past five years.

As a next step, we compared Schwälbchen Molkerei Jakob Berz's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 15% in the same period.

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. If you're wondering about Schwälbchen Molkerei Jakob Berz's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Schwälbchen Molkerei Jakob Berz Efficiently Re-investing Its Profits?

Schwälbchen Molkerei Jakob Berz's LTM (or last twelve month) payout ratio to shareholders is 15% (implying that it retains 85% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Moreover, Schwälbchen Molkerei Jakob Berz is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend.

Conclusion

Overall, we are quite pleased 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. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 2 risks we have identified for Schwälbchen Molkerei Jakob Berz visit our risks dashboard for free.

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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