Warteck Invest AG's (VTX:WARN) Financial Prospects Don't Look Very Positive: Could It Mean A Stock Price Drop In The Future?

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

Sat, Sep 28, 2024, 1:41 AM 4 min read

Most readers would already know that Warteck Invest's (VTX:WARN) stock increased by 2.1% over the past three months. However, its weak financial performance indicators makes us a bit doubtful if that trend could continue. Particularly, we will be paying attention to Warteck Invest's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. 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 Warteck Invest

How Is ROE Calculated?

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 Warteck Invest is:

2.7% = CHF13m ÷ CHF503m (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CHF1 worth of shareholders' equity, the company generated CHF0.03 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Warteck Invest's Earnings Growth And 2.7% ROE

When you first look at it, Warteck Invest's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 3.9%, the company's ROE leaves us feeling even less enthusiastic. For this reason, Warteck Invest's five year net income decline of 15% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 12% in the same 5-year period, we still found Warteck Invest's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

past-earnings-growth — SWX:WARN Past Earnings Growth September 28th 2024

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Warteck Invest's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Warteck Invest Using Its Retained Earnings Effectively?

Warteck Invest's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 80% (or a retention ratio of 20%). The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. You can see the 5 risks we have identified for Warteck Invest by visiting our risks dashboard for free on our platform here.

Additionally, Warteck Invest has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 100% over the next three years. However, Warteck Invest's future ROE is expected to rise to 4.2% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Warteck Invest. 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. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.