Fresenius Medical Care AG & Co. KGaA's (ETR:FME) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Fresenius Medical Care KGaA's (ETR:FME) stock is up by a considerable 10% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Fresenius Medical Care KGaA's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Fresenius Medical Care KGaA

How To Calculate Return On Equity?

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 Fresenius Medical Care KGaA is:

5.4% = €805m ÷ €15b (Based on the trailing twelve months to June 2023).

The 'return' is the income the business earned over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.05 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. 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.

A Side By Side comparison of Fresenius Medical Care KGaA's Earnings Growth And 5.4% ROE

At first glance, Fresenius Medical Care KGaA's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 5.4%, we may spare it some thought. But Fresenius Medical Care KGaA saw a five year net income decline of 23% over the past five years. Bear in mind, the company does have a slightly low ROE. Hence, this goes some way in explaining the shrinking earnings.

So, as a next step, we compared Fresenius Medical Care KGaA's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 5.3% over the last few years.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is FME worth today? The intrinsic value infographic in our free research report helps visualize whether FME is currently mispriced by the market.

Is Fresenius Medical Care KGaA Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 43% (where it is retaining 57% of its profits), Fresenius Medical Care KGaA has seen a decline in earnings as we saw above. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

In addition, Fresenius Medical Care KGaA 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 38%. Still, forecasts suggest that Fresenius Medical Care KGaA's future ROE will rise to 7.7% even though the the company's payout ratio is not expected to change by much.

Conclusion

On the whole, we feel that the performance shown by Fresenius Medical Care KGaA can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.