Kopparbergs Bryggeri AB (publ)'s (NGM:KOBR B) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 8.7% over the past three months, it is easy to disregard Kopparbergs Bryggeri (NGM:KOBR B). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Kopparbergs Bryggeri's ROE in this article.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Kopparbergs Bryggeri

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Kopparbergs Bryggeri is:

22% = kr224m ÷ kr1.0b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every SEK1 worth of equity, the company was able to earn SEK0.22 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Kopparbergs Bryggeri's Earnings Growth And 22% ROE

To begin with, Kopparbergs Bryggeri has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 8.9% the company's ROE is quite impressive. Despite this, Kopparbergs Bryggeri's five year net income growth was quite flat over the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

We then compared Kopparbergs Bryggeri's net income growth with the industry and found that the average industry growth rate was 6.1% in the same period.

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 Kopparbergs Bryggeri's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Kopparbergs Bryggeri Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 61% (meaning, the company retains only 39% of profits) for Kopparbergs Bryggeri suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Moreover, Kopparbergs Bryggeri has been paying dividends for five years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

In total, it does look like Kopparbergs Bryggeri has some positive aspects to its business. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Kopparbergs Bryggeri's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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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