HELLA GmbH KGaA (ETR:HLE) has had a rough month with its share price down 1.5%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study HELLA GmbH KGaA’s ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
See our latest analysis for HELLA GmbH KGaA
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for HELLA GmbH KGaA is:
11% = €345m ÷ €3.1b (Based on the trailing twelve months to June 2024).
The ‘return’ is the profit over the last twelve months. That means that for every €1 worth of shareholders’ equity, the company generated €0.11 in profit.
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
To begin with, HELLA GmbH KGaA seems to have a respectable ROE. Even when compared to the industry average of 10% the company’s ROE looks quite decent. Consequently, this likely laid the ground for the decent growth of 8.5% seen over the past five years by HELLA GmbH KGaA.
We then compared HELLA GmbH KGaA’s net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 26% in the same 5-year period, which is a bit concerning.
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. 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 HELLA GmbH KGaA’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
HELLA GmbH KGaA has a three-year median payout ratio of 28%, which implies that it retains the remaining 72% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.
Besides, HELLA GmbH KGaA has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 30%. Accordingly, forecasts suggest that HELLA GmbH KGaA’s future ROE will be 12% which is again, similar to the current ROE.
Overall, we are quite pleased with HELLA GmbH KGaA’s performance. In particular, it’s great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a respectable growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company’s earnings are expected to gain momentum. 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.