Fernheizwerk Neukölln Aktiengesellschaft (FRA:FHW) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

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

Mon, Mar 18, 2024, 12:27 AM 3 min read

With its stock down 5.8% over the past three months, it is easy to disregard Fernheizwerk Neukölln (FRA:FHW). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Fernheizwerk Neukölln'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Fernheizwerk Neukölln

How Is ROE Calculated?

ROE 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 Fernheizwerk Neukölln is:

12% = €7.2m ÷ €61m (Based on the trailing twelve months to June 2023).

The 'return' is the amount earned after tax over the last twelve months. That means that for every €1 worth of shareholders' equity, the company generated €0.12 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Fernheizwerk Neukölln's Earnings Growth And 12% ROE

To begin with, Fernheizwerk Neukölln seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 12%. However, while Fernheizwerk Neukölln has a pretty respectable ROE, its five year net income decline rate was 15% . So, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.

That being said, we compared Fernheizwerk Neukölln's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 3.7% in the same 5-year period.

past-earnings-growth — DB:FHW Past Earnings Growth March 18th 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. Is Fernheizwerk Neukölln fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Fernheizwerk Neukölln Making Efficient Use Of Its Profits?

Fernheizwerk Neukölln has a high three-year median payout ratio of 67% (that is, it is retaining 33% 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 a little being reinvested into the business, earnings growth would obviously be low or non-existent.

Additionally, Fernheizwerk Neukölln 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.

Conclusion

Overall, we feel that Fernheizwerk Neukölln certainly does have some positive factors to consider. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. 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 Fernheizwerk Neukölln'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.