Are Robust Financials Driving The Recent Rally In Carlsberg A/S' (CPH:CARL B) Stock?

Most readers would already be aware that Carlsberg's (CPH:CARL B) stock increased significantly by 7.8% over the past month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Carlsberg's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Carlsberg

How Do You 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 Carlsberg is:

16% = kr.6.8b ÷ kr.43b (Based on the trailing twelve months to December 2020).

The 'return' is the yearly profit. So, this means that for every DKK1 of its shareholder's investments, the company generates a profit of DKK0.16.

What Is The Relationship Between ROE And 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.

Carlsberg's Earnings Growth And 16% ROE

To start with, Carlsberg's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 8.3%. This certainly adds some context to Carlsberg's exceptional 36% net income growth seen over the past five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Carlsberg's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 5.7% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. What is CARL B worth today? The intrinsic value infographic in our free research report helps visualize whether CARL B is currently mispriced by the market.

Is Carlsberg Efficiently Re-investing Its Profits?

The three-year median payout ratio for Carlsberg is 50%, which is moderately low. The company is retaining the remaining 50%. By the looks of it, the dividend is well covered and Carlsberg is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Carlsberg is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 50% of its profits over the next three years. However, Carlsberg's ROE is predicted to rise to 19% despite there being no anticipated change in its payout ratio.

Summary

In total, we are pretty happy with Carlsberg'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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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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