Are Wacker Chemie AG's (ETR:WCH) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

With its stock down 4.6% over the past month, it is easy to disregard Wacker Chemie (ETR:WCH). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Wacker Chemie'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Wacker Chemie

How To 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 Wacker Chemie is:

4.8% = €229m ÷ €4.7b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.05 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 Wacker Chemie's Earnings Growth And 4.8% ROE

At first glance, Wacker Chemie's ROE doesn't look very promising. Next, when compared to the average industry ROE of 8.5%, the company's ROE leaves us feeling even less enthusiastic. In spite of this, Wacker Chemie was able to grow its net income considerably, at a rate of 40% in the last five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Wacker Chemie's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 11% in the same 5-year period.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Wacker Chemie fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Wacker Chemie Efficiently Re-investing Its Profits?

The three-year median payout ratio for Wacker Chemie is 48%, which is moderately low. The company is retaining the remaining 52%. By the looks of it, the dividend is well covered and Wacker Chemie is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Wacker Chemie 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 49% of its profits over the next three years. Regardless, the future ROE for Wacker Chemie is predicted to rise to 9.5% despite there being not much change expected in its payout ratio.

Summary

In total, it does look like Wacker Chemie has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.