Do Its Financials Have Any Role To Play In Driving WCM Beteiligungs- und Grundbesitz-AG's (ETR:WCMK) Stock Up Recently?

WCM Beteiligungs- und Grundbesitz-AG's (ETR:WCMK) stock is up by a considerable 26% over the past three months. 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. Particularly, we will be paying attention to WCM Beteiligungs- und Grundbesitz-AG's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for WCM Beteiligungs- und Grundbesitz-AG

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for WCM Beteiligungs- und Grundbesitz-AG is:

8.9% = €33m ÷ €367m (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. That means that for every €1 worth of shareholders' equity, the company generated €0.09 in profit.

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of WCM Beteiligungs- und Grundbesitz-AG's Earnings Growth And 8.9% ROE

At first glance, WCM Beteiligungs- und Grundbesitz-AG seems to have a decent ROE. Even when compared to the industry average of 9.2% the company's ROE looks quite decent. For this reason, WCM Beteiligungs- und Grundbesitz-AG's five year net income decline of 10% raises the question as to why the decent ROE didn't translate into growth. So, there might be some other aspects that could explain this. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

That being said, we compared WCM Beteiligungs- und Grundbesitz-AG's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 14% in the same period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 WCM Beteiligungs- und Grundbesitz-AG is trading on a high P/E or a low P/E, relative to its industry.

Is WCM Beteiligungs- und Grundbesitz-AG Using Its Retained Earnings Effectively?

In spite of a normal three-year median payout ratio of 48% (that is, a retention ratio of 52%), the fact that WCM Beteiligungs- und Grundbesitz-AG's earnings have shrunk is quite puzzling. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, WCM Beteiligungs- und Grundbesitz-AG has paid dividends over a period of four years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.

Summary

On the whole, we do feel that WCM Beteiligungs- und Grundbesitz-AG has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 6 risks we have identified for WCM Beteiligungs- und Grundbesitz-AG by visiting our risks dashboard for free on our platform here.

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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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