Are Poor Financial Prospects Dragging Down Kulmbacher Brauerei Aktien-Gesellschaft (MUN:KUL Stock?

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

Wed, Nov 15, 2023, 5:40 AM 4 min read

It is hard to get excited after looking at Kulmbacher Brauerei Aktien-Gesellschaft's (MUN:KUL) recent performance, when its stock has declined 1.5% over the past three months. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Specifically, we decided to study Kulmbacher Brauerei Aktien-Gesellschaft's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Kulmbacher Brauerei Aktien-Gesellschaft

How To Calculate Return On 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 Kulmbacher Brauerei Aktien-Gesellschaft is:

6.5% = €5.0m ÷ €78m (Based on the trailing twelve months to June 2023).

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 €0.06 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Kulmbacher Brauerei Aktien-Gesellschaft's Earnings Growth And 6.5% ROE

At first glance, Kulmbacher Brauerei Aktien-Gesellschaft's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.5%. But Kulmbacher Brauerei Aktien-Gesellschaft saw a five year net income decline of 5.1% over the past five years. Bear in mind, the company does have a slightly low ROE. Therefore, the decline in earnings could also be the result of this.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 0.5% in the same 5-year period, we still found Kulmbacher Brauerei Aktien-Gesellschaft's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

past-earnings-growth — MUN:KUL Past Earnings Growth November 15th 2023

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. If you're wondering about Kulmbacher Brauerei Aktien-Gesellschaft's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Kulmbacher Brauerei Aktien-Gesellschaft Efficiently Re-investing Its Profits?

Kulmbacher Brauerei Aktien-Gesellschaft has a high three-year median payout ratio of 68% (that is, it is retaining 32% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 4 risks we have identified for Kulmbacher Brauerei Aktien-Gesellschaft by visiting our risks dashboard for free on our platform here.

Moreover, Kulmbacher Brauerei Aktien-Gesellschaft has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

In total, we would have a hard think before deciding on any investment action concerning Kulmbacher Brauerei Aktien-Gesellschaft. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Kulmbacher Brauerei Aktien-Gesellschaft's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.