Do Its Financials Have Any Role To Play In Driving Südwestdeutsche Salzwerke AG's (FRA:SSH) Stock Up Recently?

Südwestdeutsche Salzwerke's (FRA:SSH) stock is up by a considerable 17% over the past month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Südwestdeutsche Salzwerke's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Südwestdeutsche Salzwerke

How Do You Calculate Return On Equity?

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 Südwestdeutsche Salzwerke is:

13% = €32m ÷ €253m (Based on the trailing twelve months to December 2023).

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

Südwestdeutsche Salzwerke's Earnings Growth And 13% ROE

To begin with, Südwestdeutsche Salzwerke seems to have a respectable ROE. Even when compared to the industry average of 13% the company's ROE looks quite decent. This certainly adds some context to Südwestdeutsche Salzwerke's moderate 11% net income growth seen over the past five years.

As a next step, we compared Südwestdeutsche Salzwerke's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 15% in the same period.

Earnings growth is a huge factor in stock valuation. 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. Is Südwestdeutsche Salzwerke fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Südwestdeutsche Salzwerke Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 67% (or a retention ratio of 33%) for Südwestdeutsche Salzwerke suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Südwestdeutsche Salzwerke 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.

Summary

On the whole, we do feel that Südwestdeutsche Salzwerke has some positive attributes. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. Up till now, we've only made a short study of the company's growth data. To gain further insights into Südwestdeutsche Salzwerke'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. 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.