Most readers will already know that the Kendrion (AMS:KENDR) stock price has increased by a significant 12% over the past three months. However, since it is ultimately a company's long-term financial performance that determines market outcomes, we decided to focus on its weak fundamentals in this article. Specifically, in this article we decided to study Kendrion's ROE.
Return on equity or ROE tests how effectively a company is growing its value and managing investors' money. In other words, ROE shows the profit generated per dollar of a shareholder's investment.
Check out our latest analysis for Kendrion.
How do I calculate return on equity?
of ROE calculation formula teeth:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, Kendrion's ROE is:
5.8% = €9.9 million ÷ €172 million (based on the trailing twelve months to December 2023).
“Return” is the annual profit. Another way to think of it is that for every 1 euro worth of stock, the company allowed him to earn a profit of 0.06 euros.
What is the relationship between ROE and profit growth rate?
So far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits a company reinvests or “retains”, and how effectively it does so, we are then able to assess a company's earnings growth potential. All else being equal, companies with higher return on equity and profit retention typically have higher growth rates compared to companies that don't have the same characteristics.
Kendrion's earnings growth and ROE 5.8%
At first glance, Kendrion's ROE does not look very promising. Next, when compared to his industry's average ROE of 8.7%, we find the company's ROE even less encouraging. Considering the circumstances, it's not surprising that Kendrion's net income has declined by 50% over the past five years. We believe that other factors may also be at play here. For example, a company may have poor capital allocation or a very high payout ratio.
That being said, we compared Kendrion's performance to its industry and found that while the company's profits have been shrinking, the industry has grown profits at a rate of 4.0% over the same five-year period, which is concerning. I held it.
Earnings growth is a big factor in stock valuation. The next thing investors need to determine is whether the expected earnings growth is already built into the stock price, or the lack thereof. This can help you decide whether to position the stock for a bright or bleak future. Is Kendrion fairly valued compared to other companies? These 3 valuation metrics can help you decide.
Is Kendrion using its profits efficiently?
Kendrion's earnings decline is not surprising, given that the company spends most of its profits on dividends, based on its three-year median payout ratio of 73% (or retention rate of 27%). There is little money left to reinvest in the business, so earnings are unlikely to increase. To learn about the two risks we have identified for Kendrion, please visit our risks dashboard for free.
Additionally, Kendrion has been paying dividends for at least 10 years. This means the company's management is determined to pay a dividend, even if earnings growth means little. After researching the latest analyst consensus data, we find that the company's future dividend payout ratio is expected to drop to 41% over the next three years. The company's ROE is expected to rise to 11% over the same period, which can be explained by the lower dividend payout ratio.
conclusion
Overall, we would be very cautious before making a decision about Kendrion. The company hasn't been reinvesting much in its business, and given its low ROE, it's no surprise that its earnings aren't growing or growing at all. Having said that, we researched the latest analyst forecasts and found that while the company has seen its earnings shrink in the past, analysts expect its future earnings to grow. Learn more about the company's future revenue growth forecasts here. free Create a report on analyst forecasts to learn more about the company.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
