Knorr-Bremse’s (ETR:KBX) stock is up by 4.5% over the past month. Given that stock prices are usually aligned with a company’s financial performance in the long-term, we decided to investigate if the company’s decent financials had a hand to play in the recent price move. Particularly, we will be paying attention to Knorr-Bremse’s ROE today.
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.
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 Knorr-Bremse is:
15% = €458m ÷ €3.0b (Based on the trailing twelve months to June 2025).
The ‘return’ is the yearly profit. So, this means that for every €1 of its shareholder’s investments, the company generates a profit of €0.15.
Check out our latest analysis for Knorr-Bremse
So far, we’ve learned that ROE is a measure of a company’s profitability. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
To begin with, Knorr-Bremse seems to have a respectable ROE. Especially when compared to the industry average of 10% the company’s ROE looks pretty impressive. However, we are curious as to how the high returns still resulted in 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. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.
We then compared Knorr-Bremse’s net income growth with the industry and found that the average industry growth rate was 17% in the same 5-year period.
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. What is KBX worth today? The intrinsic value infographic in our free research report helps visualize whether KBX is currently mispriced by the market.
Despite having a normal three-year median payout ratio of 48% (implying that the company keeps 52% of its income) over the last three years, Knorr-Bremse has seen a negligible amount of growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Moreover, Knorr-Bremse has been paying dividends for six years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 46%. Still, forecasts suggest that Knorr-Bremse’s future ROE will rise to 21% even though the the company’s payout ratio is not expected to change by much.
Overall, we feel that Knorr-Bremse certainly does have some positive factors to consider. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn’t the case here. This suggests that there might be some external threat to the business, that’s hampering its growth. 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.