Declining Stock and Solid Fundamentals: Is The Market Wrong About HELLA GmbH & Co. KGaA (ETR:HLE)?
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It is hard to get excited after looking at HELLA GmbH KGaA's (ETR:HLE) recent performance, when its stock has declined 6.1% over the past month. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on HELLA GmbH KGaA's ROE.
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.
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 HELLA GmbH KGaA is:
11% = €371m ÷ €3.2b (Based on the trailing twelve months to December 2024).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.11 in profit.
Check out our latest analysis for HELLA GmbH KGaA
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
HELLA GmbH KGaA's Earnings Growth And 11% ROE
To start with, HELLA GmbH KGaA's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 11%. This certainly adds some context to HELLA GmbH KGaA's exceptional 35% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing HELLA GmbH KGaA's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 35% over the last few years.
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. Is HELLA GmbH KGaA fairly valued compared to other companies? These 3 valuation measures might help you decide.