Do Its Financials Have Any Role To Play In Driving Continental Aktiengesellschaft's (ETR:CON) Stock Up Recently?
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Most readers would already be aware that Continental's (ETR:CON) stock increased significantly by 14% over the past month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Continental's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
How Do You Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Continental is:
8.1% = €1.2b ÷ €15b (Based on the trailing twelve months to March 2025).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.08 in profit.
View our latest analysis for Continental
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Continental's Earnings Growth And 8.1% ROE
When you first look at it, Continental's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 10% either. In spite of this, Continental was able to grow its net income considerably, at a rate of 54% in the last five years. So, there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.
As a next step, we compared Continental's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 36%.