Are Aktieselskabet Schouw & Co.'s (CPH:SCHO) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

With its stock down 4.9% over the past three months, it is easy to disregard Aktieselskabet Schouw (CPH:SCHO). It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Specifically, we decided to study Aktieselskabet Schouw'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Aktieselskabet Schouw

How Is ROE Calculated?

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 Aktieselskabet Schouw is:

8.9% = kr.1.0b ÷ kr.12b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every DKK1 of its shareholder's investments, the company generates a profit of DKK0.09.

What Has ROE Got To Do With 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. 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.

Aktieselskabet Schouw's Earnings Growth And 8.9% ROE

On the face of it, Aktieselskabet Schouw's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.5%. However, Aktieselskabet Schouw has seen a flattish net income growth over the past five years, which is not saying much. Bear in mind, the company's ROE is not very high. So that could also be one of the reasons behind the company's flat growth in earnings.

We then compared Aktieselskabet Schouw's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 8.8% in the same 5-year period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Aktieselskabet Schouw's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Aktieselskabet Schouw Using Its Retained Earnings Effectively?

Despite having a moderate three-year median payout ratio of 36% (meaning the company retains64% of profits) in the last three-year period, Aktieselskabet Schouw's earnings growth was more or les flat. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Moreover, Aktieselskabet Schouw 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 32% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 10%.

Summary

On the whole, we feel that the performance shown by Aktieselskabet Schouw can be open to many interpretations. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.