Friedrich Vorwerk Group SE's (ETR:VH2) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

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editorial-team@simplywallst.com (Simply Wall St)

Sun, Jan 19, 2025, 1:38 AM 4 min read

Most readers would already be aware that Friedrich Vorwerk Group's (ETR:VH2) stock increased significantly by 21% over the past week. 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. Particularly, we will be paying attention to Friedrich Vorwerk Group's ROE today.

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.

See our latest analysis for Friedrich Vorwerk Group

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 Friedrich Vorwerk Group is:

16% = €30m ÷ €192m (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.16 in profit.

Why Is ROE Important For Earnings Growth?

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 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.

Friedrich Vorwerk Group's Earnings Growth And 16% ROE

To start with, Friedrich Vorwerk Group's ROE looks acceptable. On comparing with the average industry ROE of 11% the company's ROE looks pretty remarkable. Needless to say, we are quite surprised to see that Friedrich Vorwerk Group's net income shrunk at a rate of 21% over the past five years. We reckon that there could be some other factors at play here that are preventing 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.

However, when we compared Friedrich Vorwerk Group's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 29% in the same period. This is quite worrisome.

past-earnings-growth — XTRA:VH2 Past Earnings Growth January 19th 2025

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Friedrich Vorwerk Group is trading on a high P/E or a low P/E, relative to its industry.

Is Friedrich Vorwerk Group Efficiently Re-investing Its Profits?

When we piece together Friedrich Vorwerk Group's low three-year median payout ratio of 15% (where it is retaining 85% of its profits), calculated for the last three-year period, we are puzzled by the lack of growth. This typically shouldn't be the case when a company is retaining most of its earnings. So there might be other factors at play here which could potentially be hampering growth. For instance, the business has faced some headwinds.

In addition, Friedrich Vorwerk Group has been paying dividends over a period of three years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 16%. As a result, Friedrich Vorwerk Group's ROE is not expected to change by much either, which we inferred from the analyst estimate of 15% for future ROE.

Summary

In total, it does look like Friedrich Vorwerk Group has some positive aspects to its business. 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. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.