Südwestdeutsche Salzwerke’s (FRA:SSH) stock up by 2.7% over the past month. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company’s key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Südwestdeutsche Salzwerke’s ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
See our latest analysis for Südwestdeutsche Salzwerke
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 Südwestdeutsche Salzwerke is:
4.8% = €11m ÷ €237m (Based on the trailing twelve months to December 2022).
The ‘return’ refers to a company’s earnings over the last year. So, this means that for every €1 of its shareholder’s investments, the company generates a profit of €0.05.
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.
Südwestdeutsche Salzwerke’s Earnings Growth And 4.8% ROE
On the face of it, Südwestdeutsche Salzwerke’s ROE is not much to talk about. Next, when compared to the average industry ROE of 11%, the company’s ROE leaves us feeling even less enthusiastic. Although, we can see that Südwestdeutsche Salzwerke saw a modest net income growth of 7.1% over the past five years. We reckon that there could be other factors at play here. 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 Südwestdeutsche Salzwerke’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 7.1% in the same period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Südwestdeutsche Salzwerke’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Südwestdeutsche Salzwerke Making Efficient Use Of Its Profits?
Südwestdeutsche Salzwerke has a healthy combination of a moderate three-year median payout ratio of 41% (or a retention ratio of 59%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.
Additionally, Südwestdeutsche Salzwerke has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.
Summary
In total, it does look like Südwestdeutsche Salzwerke has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won’t completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 2 risks we have identified for Südwestdeutsche Salzwerke.
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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.
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