It is hard to get excited after looking at HELLA GmbH KGaA’s (ETR:HLE) recent performance, when its stock has declined 6.1% over the past month. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on HELLA GmbH KGaA’s ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
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 HELLA GmbH KGaA is:
11% = €371m ÷ €3.2b (Based on the trailing twelve months to December 2024).
The ‘return’ is the profit over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.11 in profit.
Check out our latest analysis for HELLA GmbH KGaA
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. 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 start with, HELLA GmbH KGaA’s ROE looks acceptable. Further, the company’s ROE is similar to the industry average of 11%. This certainly adds some context to HELLA GmbH KGaA’s exceptional 35% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing HELLA GmbH KGaA’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 35% over the last few years.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is HELLA GmbH KGaA fairly valued compared to other companies? These 3 valuation measures might help you decide.
The three-year median payout ratio for HELLA GmbH KGaA is 30%, which is moderately low. The company is retaining the remaining 70%. So it seems that HELLA GmbH KGaA is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that’s well covered.
Additionally, HELLA GmbH KGaA 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. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 29% of its profits over the next three years. As a result, HELLA GmbH KGaA’s ROE is not expected to change by much either, which we inferred from the analyst estimate of 12% for future 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 sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.