Most readers would already know that Knorr-Bremse’s (ETR:KBX) stock increased by 5.2% over the past three months. 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 Knorr-Bremse’s ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company’s success at turning shareholder investments into profits.
View our latest analysis for Knorr-Bremse
How To 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 Knorr-Bremse is:
21% = €628m ÷ €3.0b (Based on the trailing twelve months to June 2024).
The ‘return’ refers to a company’s earnings over the last year. That means that for every €1 worth of shareholders’ equity, the company generated €0.21 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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 Knorr-Bremse’s Earnings Growth And 21% ROE
Firstly, we acknowledge that Knorr-Bremse has a significantly high ROE. Secondly, even when compared to the industry average of 10% the company’s ROE is quite impressive. However, we are curious as to how the high returns still resulted in a flat growth for Knorr-Bremse in the past five years. Based on this, we feel that there might be other reasons which haven’t been discussed so far in this article that could be hampering the company’s growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
We then compared Knorr-Bremse’s net income growth with the industry and found that the average industry growth rate was 15% in the same 5-year 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. What is KBX worth today? The intrinsic value infographic in our free research report helps visualize whether KBX is currently mispriced by the market.
Is Knorr-Bremse Efficiently Re-investing Its Profits?
Despite having a normal three-year median payout ratio of 47% (implying that the company keeps 53% of its income) over the last three years, Knorr-Bremse has seen a negligible amount of growth in earnings as we saw above. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Moreover, Knorr-Bremse has been paying dividends for five years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 47% of its profits over the next three years. As a result, Knorr-Bremse’s ROE is not expected to change by much either, which we inferred from the analyst estimate of 19% for future ROE.
Summary
Overall, we feel that Knorr-Bremse certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. Having said that, looking at current analyst estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.