Most readers will already know that the Krones (ETR:KRN) share price has increased by a significant 11% over the past month. Given that the market rewards strong financials in the long run, I wonder if that will be the case this time as well. Specifically, we decided to study Krones’s ROE in this article.
Return on equity or ROE is a key measure used to evaluate how efficiently a company’s management is utilizing the company’s capital. More simply, it measures a company’s profitability in relation to shareholder equity.
Check out our latest analysis for Krones.
How is ROE calculated?
ROE can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders’ equity
So, based on the above formula, the ROE for Krones is:
13% = €238 million ÷ €1.8 billion (based on the trailing twelve months to June 2024).
“Return” is the annual profit. Another way to think of it is that for every €1 worth of shares it owned, the company earned €0.13 in profit.
Why is ROE important for profit growth?
So far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits a 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, companies with high return on equity and profit retention will have higher growth rates than companies without these attributes.
Krones earnings growth and ROE 13%
First of all, Krones appears to have a respectable ROE. The company’s ROE looks quite impressive when compared to the industry average ROE of 10%. This probably laid the foundation for the massive 44% net profit growth seen by Krones over the past five years. We think there may be other aspects that are positively impacting the company’s earnings growth. For example, a company with a low dividend payout ratio or a company with efficient management.
Next, if we compare it to the industry’s net income growth rate, we find that Krones has a very high growth rate when compared to the industry average growth rate of 15% over the same period, which is great.
Past revenue growth
The foundations that give a company value have a lot to do with its revenue growth. The next thing investors need to determine is whether the expected earnings growth is already built into the stock price, or the lack thereof. This can help you decide whether to position the stock 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 outlook. So you might want to check whether Krones is trading on a higher or lower P/E ratio relative to its industry.
the story continues
Is Krones using its profits efficiently?
Krones’ median three-year payout ratio is 26% (retaining 74% of earnings), which is neither too low nor too high. Apparently, the dividend is well covered, and Krones reinvests its profits efficiently, as evidenced by the exceptional growth discussed above.
Additionally, Krones has been paying dividends for at least 10 years. This shows that the company is committed to sharing profits with shareholders. We checked the latest analyst consensus data and found that the company is expected to continue paying out around 25% of its profit over the next three years. Therefore, Krones’s future ROE is expected to be 16%, which is also similar to its current ROE.
summary
Overall, I feel that Krones’ performance was very good. Specifically, we like that the company reinvests a huge amount of its profits at a high rate of return. Of course, this significantly increased the company’s revenue. Having said that, a review of the latest analyst forecasts indicates that the company’s future revenue growth is expected to slow. To know more about the company’s future revenue growth forecasts, take a look at this free report on analyst forecasts for the company.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
