Stock Analysis

Is HORNBACH Holding AG & Co. KGaA's (ETR:HBH) Latest Stock Performance A Reflection Of Its Financial Health?

•  Updated

HORNBACH Holding KGaA (ETR:HBH) has had a great run on the share market with its stock up by a significant 7.4% over the last month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on HORNBACH Holding KGaA's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for HORNBACH Holding KGaA

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 HORNBACH Holding KGaA is:

13% = €243m ÷ €1.8b (Based on the trailing twelve months to November 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.13.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

HORNBACH Holding KGaA's Earnings Growth And 13% ROE

At first glance, HORNBACH Holding KGaA seems to have a decent ROE. On comparing with the average industry ROE of 9.9% the company's ROE looks pretty remarkable. Probably as a result of this, HORNBACH Holding KGaA was able to see a decent growth of 15% over the last five years.

Next, on comparing HORNBACH Holding KGaA's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 15% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is HBH fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is HORNBACH Holding KGaA Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 28% (implying that the company retains 72% of its profits), it seems that HORNBACH Holding KGaA is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, HORNBACH Holding KGaA has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 20% over the next three years. Still forecasts suggest that HORNBACH Holding KGaA's future ROE will drop to 9.8% even though the the company's payout ratio is expected to decrease. This suggests that there could be other factors could driving the anticipated decline in the company's ROE.

Summary

Overall, we are quite pleased with HORNBACH Holding KGaA's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. 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. 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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