It’s hard to get excited after watching the recent performance of Fresenius Medical Care KGaA (ETR:FME), as its stock has fallen 23% in the past three months. It’s possible that the markets ignored the company’s financial differences and decided to look into the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so pay close attention to them. Specifically, we decided to study the ROE of Fresenius Medical Care KGaA in this article.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In simple terms, it is used to assess the profitability of a company in relation to its equity.
See our latest analysis for Fresenius Medical Care KGaA
How do you calculate return on equity?
The ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE of Fresenius Medical Care KGaA is:
7.7% = €1.1 billion ÷ €15 billion (based on the last twelve months until March 2022).
“Yield” refers to a company’s earnings over the past year. Another way to think about this is that for every €1 of equity, the company was able to make a profit of €0.08.
What is the relationship between ROE and earnings growth?
We have already established that ROE serves as an effective earnings-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
Profit growth and ROE of 7.7% from Fresenius Medical Care KGaA
At first glance, the ROE of Fresenius Medical Care KGaA does not look so attractive. Yet further investigation shows that the company’s ROE is similar to the industry average of 7.8%. But again, Fresenius Medical Care KGaA’s five-year net profit fell by 8.5%. Remember that the company’s ROE is a bit low to start with. Therefore, this partly explains the drop in income.
In a next step, we compared the performance of Fresenius Medical Care KGaA with the industry and found that the performance of Fresenius Medical Care KGaA is depressing even compared to the industry, which reduced its profits at a rate of 0 .7% over the same period, which is a slower than the business.
Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. If you’re wondering about Fresenius Medical Care KGaA’s valuation, check out this indicator of its price-earnings ratio, relative to its industry.
Does Fresenius Medical Care KGaA make effective use of its profits?
Despite a normal three-year median payout ratio of 30% (where it retains 70% of its profits), Fresenius Medical Care KGaA has seen declining profits, as seen above. So there could be other explanations for this. For example, the company’s business may deteriorate.
Furthermore, Fresenius Medical Care KGaA has paid dividends over a period of at least ten years, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of business growth. the company. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out about 31% of its earnings over the next three years. Still, forecasts suggest Fresenius Medical Care KGaA’s future ROE will increase to 11%, even though the company’s payout ratio is not expected to change much.
Overall, we believe that the performance displayed by Fresenius Medical Care KGaA is subject to many interpretations. Although the company has a high earnings retention rate, its low rate of return is likely hampering its earnings growth. That being the case, the latest forecasts from industry analysts show that analysts are expecting a huge improvement in the company’s earnings growth rate. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.