In This Article:
Fernheizwerk Neukölln (FRA:FHW) has had a rough three months with its share price down 12%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Fernheizwerk Neukölln's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Fernheizwerk Neukölln
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Fernheizwerk Neukölln is:
9.2% = €5.4m ÷ €58m (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.09.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
Fernheizwerk Neukölln's Earnings Growth And 9.2% ROE
To start with, Fernheizwerk Neukölln's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 6.2%. Needless to say, we are quite surprised to see that Fernheizwerk Neukölln's net income shrunk at a rate of 11% over 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. These include low earnings retention or poor allocation of capital.
Next, we compared Fernheizwerk Neukölln's performance against the industry and found that the industry shrunk its earnings at 23% in the same period, which suggests that the company's earnings have been shrinking at a slower rate than its industry, This does offer shareholders some relief
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Fernheizwerk Neukölln fairly valued compared to other companies? These 3 valuation measures might help you decide.