Are Poor Financial Prospects Dragging Down STINAG Stuttgart Invest AG (FRA:STG Stock?

With its stock down 5.1% over the past month, it is easy to disregard STINAG Stuttgart Invest (FRA:STG). We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Particularly, we will be paying attention to STINAG Stuttgart Invest'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for STINAG Stuttgart Invest

How Do You Calculate Return On Equity?

ROE 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 STINAG Stuttgart Invest is:

3.1% = €4.7m ÷ €152m (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.03 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. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

STINAG Stuttgart Invest's Earnings Growth And 3.1% ROE

When you first look at it, STINAG Stuttgart Invest's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 9.2%, the company's ROE leaves us feeling even less enthusiastic. Given the circumstances, the significant decline in net income by 7.2% seen by STINAG Stuttgart Invest over the last five years is not surprising. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. Such as - low earnings retention or poor allocation of capital.

So, as a next step, we compared STINAG Stuttgart Invest'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 14% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 STINAG Stuttgart Invest is trading on a high P/E or a low P/E, relative to its industry.

Is STINAG Stuttgart Invest Efficiently Re-investing Its Profits?

With a three-year median payout ratio as high as 126%,STINAG Stuttgart Invest's shrinking earnings don't come as a surprise as the company is paying a dividend which is beyond its means. Its usually very hard to sustain dividend payments that are higher than reported profits. Our risks dashboard should have the 5 risks we have identified for STINAG Stuttgart Invest.

Moreover, STINAG Stuttgart Invest has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning STINAG Stuttgart Invest. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of STINAG Stuttgart Invest's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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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