Can DATA MODUL Aktiengesellschaft, Produktion und Vertrieb von elektronischen Systemen (ETR:DAM) Performance Keep Up Given Its Mixed Bag Of Fundamentals?

Most readers would already know that DATA MODUL Produktion und Vertrieb von elektronischen Systemen's (ETR:DAM) stock increased by 3.9% over the past three months. However, we decided to study the company's mixed-bag of fundamentals to assess what this could mean for future share prices, as stock prices tend to be aligned with a company's long-term financial performance. 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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

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 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 amount earned after tax over the last twelve months. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.06 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

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. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 7.6%. Therefore, it might not be wrong to say that the five year net income decline of 3.7% seen by DATA MODUL Produktion und Vertrieb von elektronischen Systemen was probably the result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.

However, when we compared DATA MODUL Produktion und Vertrieb von elektronischen Systemen's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 11% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 DATA MODUL Produktion und Vertrieb von elektronischen Systemen is trading on a high P/E or a low P/E, relative 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. The low payout should mean that the company is retaining most of its earnings and consequently, should see some growth. So there might be other factors at play here which could potentially be hampering growth. For instance, the business has faced some headwinds.

Moreover, DATA MODUL Produktion und Vertrieb von elektronischen Systemen 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. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 30% over the next three years. Regardless, the future ROE for DATA MODUL Produktion und Vertrieb von elektronischen Systemen is speculated to rise to 9.8% 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

Overall, we have mixed feelings about DATA MODUL Produktion und Vertrieb von elektronischen Systemen. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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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