Stock Analysis

Deutsche Wohnen SE (ETR:DWNI) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

XTRA:DWNI
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It is hard to get excited after looking at Deutsche Wohnen's (ETR:DWNI) recent performance, when its stock has declined 3.7% over the past three months. 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. Particularly, we will be paying attention to Deutsche Wohnen's ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Deutsche Wohnen

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 Deutsche Wohnen is:

10% = €1.3b ÷ €13b (Based on the trailing twelve months to September 2020).

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 €0.10 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Deutsche Wohnen's Earnings Growth And 10% ROE

At first glance, Deutsche Wohnen seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 9.9%. Despite the moderate return on equity, Deutsche Wohnen has posted a net income growth of 3.2% over the past five years. So, there could be some other factors at play that could be impacting the company's growth. For instance, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

Next, on comparing with the industry net income growth, we found that Deutsche Wohnen's reported growth was lower than the industry growth of 13% in the same period, which is not something we like to see.

past-earnings-growth
XTRA:DWNI Past Earnings Growth November 21st 2020

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. Is Deutsche Wohnen fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Deutsche Wohnen Efficiently Re-investing Its Profits?

Deutsche Wohnen's low three-year median payout ratio of 17% (or a retention ratio of 83%) should mean that the company is retaining most of its earnings to fuel its growth. However, the low earnings growth number doesn't reflect this as high growth usually follows high profit retention. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Deutsche Wohnen has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 66% over the next three years. Regardless, the future ROE for Deutsche Wohnen is speculated to rise to 13% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Summary

In total, it does look like Deutsche Wohnen has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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