Kulmbacher Brauerei Aktien-Gesellschaft (MUN:KUL) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

With its stock down 1.6% over the past three months, it is easy to disregard Kulmbacher Brauerei Aktien-Gesellschaft (MUN:KUL). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Kulmbacher Brauerei Aktien-Gesellschaft'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Kulmbacher Brauerei Aktien-Gesellschaft

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 Kulmbacher Brauerei Aktien-Gesellschaft is:

9.8% = €8.2m ÷ €84m (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.10 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

A Side By Side comparison of Kulmbacher Brauerei Aktien-Gesellschaft's Earnings Growth And 9.8% ROE

At first glance, Kulmbacher Brauerei Aktien-Gesellschaft seems to have a decent ROE. Especially when compared to the industry average of 7.0% the company's ROE looks pretty impressive. This probably laid the ground for Kulmbacher Brauerei Aktien-Gesellschaft's moderate 12% net income growth seen over the past five years.

We then performed a comparison between Kulmbacher Brauerei Aktien-Gesellschaft's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 12% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. 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 Kulmbacher Brauerei Aktien-Gesellschaft is trading on a high P/E or a low P/E, relative to its industry.

Is Kulmbacher Brauerei Aktien-Gesellschaft Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 40% (implying that the company retains 60% of its profits), it seems that Kulmbacher Brauerei Aktien-Gesellschaft is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, Kulmbacher Brauerei Aktien-Gesellschaft has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, we are pretty happy with Kulmbacher Brauerei Aktien-Gesellschaft'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 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. 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. To know the 1 risk we have identified for Kulmbacher Brauerei Aktien-Gesellschaft visit our risks dashboard for free.

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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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