With its stock down 14% over the past three months, it is easy to disregard Nebelhornbahn-Aktiengesellschaft (MUN:NHB). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Nebelhornbahn-Aktiengesellschaft’s ROE today.
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 simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
Check out our latest analysis for Nebelhornbahn-Aktiengesellschaft
How Do You Calculate Return On Equity?
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 Nebelhornbahn-Aktiengesellschaft is:
2.8% = €446k ÷ €16m (Based on the trailing twelve months to October 2019).
The ‘return’ is the yearly profit. That means that for every €1 worth of shareholders’ equity, the company generated €0.03 in profit.
Why Is ROE Important For Earnings Growth?
So far, we’ve learnt 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.
A Side By Side comparison of Nebelhornbahn-Aktiengesellschaft’s Earnings Growth And 2.8% ROE
On the face of it, Nebelhornbahn-Aktiengesellschaft’s ROE is not much to talk about. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 16% either. Nebelhornbahn-Aktiengesellschaft was still able to see a decent net income growth of 6.8% over the past five years. So, the growth in the company’s earnings could probably have been caused by other variables. 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.
We then compared Nebelhornbahn-Aktiengesellschaft’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 0.8% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about Nebelhornbahn-Aktiengesellschaft’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Nebelhornbahn-Aktiengesellschaft Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 51% (or a retention ratio of 49%) for Nebelhornbahn-Aktiengesellschaft suggests that the company’s growth wasn’t really hampered despite it returning most of its income to its shareholders.
Moreover, Nebelhornbahn-Aktiengesellschaft 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.
In total, it does look like Nebelhornbahn-Aktiengesellschaft has some positive aspects to its business. That is, quite an impressive growth in earnings. However, the low profit retention means that the company’s earnings growth could have been higher, had it been reinvesting a higher portion of its profits. 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 Nebelhornbahn-Aktiengesellschaft’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. Thank you for reading.