Will Weakness in Schwälbchen Molkerei Jakob Berz AG's (FRA:SMB) Stock Prove Temporary Given Strong Fundamentals?

It is hard to get excited after looking at Schwälbchen Molkerei Jakob Berz's (FRA:SMB) recent performance, when its stock has declined 7.5% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Schwälbchen Molkerei Jakob Berz's ROE today.

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.

Check out our latest analysis for Schwälbchen Molkerei Jakob Berz

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 Schwälbchen Molkerei Jakob Berz is:

9.2% = €3.1m ÷ €33m (Based on the trailing twelve months to December 2019).

The 'return' is the yearly profit. That means that for every €1 worth of shareholders' equity, the company generated €0.09 in profit.

What Is The Relationship Between ROE And 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 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.

Schwälbchen Molkerei Jakob Berz's Earnings Growth And 9.2% ROE

To start with, Schwälbchen Molkerei Jakob Berz's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 8.2%. However, we are curious as to how Schwälbchen Molkerei Jakob Berz's decent returns still resulted in flat growth for Schwälbchen Molkerei Jakob Berz in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

We then performed a comparison between Schwälbchen Molkerei Jakob Berz's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 1.8% in the same period.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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?

Despite having a moderate three-year median payout ratio of 29% (meaning the company retains71% of profits) in the last three-year period, Schwälbchen Molkerei Jakob Berz's earnings growth was more or les flat. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Schwälbchen Molkerei Jakob Berz 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.

Conclusion

In total, we are pretty happy with Schwälbchen Molkerei Jakob Berz'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 respectable growth in its earnings. Up till now, we've only made a short study of the company's growth data. To gain further insights into Schwälbchen Molkerei Jakob Berz's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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This article by Simply Wall St is general in nature. 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.
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