Are Kronos Worldwide, Inc.'s (NYSE:KRO) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

Kronos Worldwide (NYSE:KRO) has had a rough week with its share price down 3.6%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Kronos Worldwide's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Kronos Worldwide

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Kronos Worldwide is:

8.0% = US$64m ÷ US$797m (Based on the trailing twelve months to December 2020).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.08 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Kronos Worldwide's Earnings Growth And 8.0% ROE

On the face of it, Kronos Worldwide's ROE is not much to talk about. Next, when compared to the average industry ROE of 10%, the company's ROE leaves us feeling even less enthusiastic. However, the moderate 16% net income growth seen by Kronos Worldwide over the past five years is definitely a positive. So, there might be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Kronos Worldwide's growth is quite high when compared to the industry average growth of 5.3% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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 Kronos Worldwide's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Kronos Worldwide Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 70% (or a retention ratio of 30%) for Kronos Worldwide suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Kronos Worldwide 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 80% of its profits over the next three years. Regardless, the future ROE for Kronos Worldwide is predicted to rise to 12% despite there being not much change expected in its payout ratio.

Conclusion

On the whole, we do feel that Kronos Worldwide has some positive attributes. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less 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 Kronos Worldwide's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

If you decide to trade Kronos Worldwide, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.