Kopparbergs Bryggeri AB (publ)'s (NGM:KOBR B) Stock Is Going Strong: Have Financials A Role To Play?

Kopparbergs Bryggeri's (NGM:KOBR B) stock is up by a considerable 10% over the past month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Kopparbergs Bryggeri's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Kopparbergs Bryggeri

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 Kopparbergs Bryggeri is:

19% = kr179m ÷ kr931m (Based on the trailing twelve months to December 2020).

The 'return' is the profit over the last twelve months. So, this means that for every SEK1 of its shareholder's investments, the company generates a profit of SEK0.19.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

A Side By Side comparison of Kopparbergs Bryggeri's Earnings Growth And 19% ROE

To begin with, Kopparbergs Bryggeri seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 8.1%. Needless to say, we are quite surprised to see that Kopparbergs Bryggeri's net income shrunk at a rate of 2.1% over the past five years. Therefore, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.

That being said, we compared Kopparbergs Bryggeri'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 5.6% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. 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 Kopparbergs Bryggeri is trading on a high P/E or a low P/E, relative to its industry.

Is Kopparbergs Bryggeri Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 60% (implying that 40% of the profits are retained), most of Kopparbergs Bryggeri's profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. You can see the 2 risks we have identified for Kopparbergs Bryggeri by visiting our risks dashboard for free on our platform here.

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 consistent dividends even though earnings have been shrinking.

Conclusion

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. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. 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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