Yahoo Finance Are Südwestdeutsche Salzwerke AG's (FRA:SSH) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?
It is hard to get excited after looking at Südwestdeutsche Salzwerke's (FRA:SSH) recent performance, when its stock has declined 21% over the past three months. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Südwestdeutsche Salzwerke's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Südwestdeutsche Salzwerke
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 Südwestdeutsche Salzwerke is:
13% = €32m ÷ €253m (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.13 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.
Südwestdeutsche Salzwerke's Earnings Growth And 13% ROE
To start with, Südwestdeutsche Salzwerke's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 8.6%. This certainly adds some context to Südwestdeutsche Salzwerke's decent 11% net income growth seen over the past five years.
We then compared Südwestdeutsche Salzwerke's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 15% in the same 5-year period, which is a bit concerning.
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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Südwestdeutsche Salzwerke's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Südwestdeutsche Salzwerke Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 67% (or a retention ratio of 33%) for Südwestdeutsche Salzwerke suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Moreover, Südwestdeutsche Salzwerke is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.
Conclusion
On the whole, we do feel that Südwestdeutsche Salzwerke has some positive attributes. Its earnings growth is decent, and the high ROE does contribute to that growth. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Südwestdeutsche Salzwerke's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.
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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.
