Are DATA MODUL Aktiengesellschaft, Produktion und Vertrieb von elektronischen Systemen's (ETR:DAM) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

With its stock down 3.0% over the past three months, it is easy to disregard DATA MODUL Produktion und Vertrieb von elektronischen Systemen (ETR:DAM). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on DATA MODUL Produktion und Vertrieb von elektronischen Systemen's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for DATA MODUL Produktion und Vertrieb von elektronischen Systemen

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 DATA MODUL Produktion und Vertrieb von elektronischen Systemen is:

5.6% = €5.8m ÷ €103m (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. That means that for every €1 worth of shareholders' equity, the company generated €0.06 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 DATA MODUL Produktion und Vertrieb von elektronischen Systemen's Earnings Growth And 5.6% ROE

When you first look at it, DATA MODUL Produktion und Vertrieb von elektronischen Systemen's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 7.6% either. Given the circumstances, the significant decline in net income by 3.7% seen by DATA MODUL Produktion und Vertrieb von elektronischen Systemen 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. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

That being said, we compared DATA MODUL Produktion und Vertrieb von elektronischen Systemen'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 13% 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. If you're wondering about DATA MODUL Produktion und Vertrieb von elektronischen Systemen's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is DATA MODUL Produktion und Vertrieb von elektronischen Systemen Making Efficient Use Of Its Profits?

DATA MODUL Produktion und Vertrieb von elektronischen Systemen's low three-year median payout ratio of 4.0% (implying that it retains the remaining 96% of its profits) comes as a surprise when you pair it with the shrinking earnings. This typically shouldn't be the case when a company is retaining most of its earnings. So there could be some other explanations in that regard. For example, the company's business may be deteriorating.

In addition, DATA MODUL Produktion und Vertrieb von elektronischen Systemen has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 30% over the next three years. However, DATA MODUL Produktion und Vertrieb von elektronischen Systemen's future ROE is expected to rise to 9.8% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Conclusion

In total, we're a bit ambivalent about DATA MODUL Produktion und Vertrieb von elektronischen Systemen's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow 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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