Declining Stock and Decent Financials: Is The Market Wrong About Kuehne + Nagel International AG (VTX:KNIN)?
It is hard to get excited after looking at Kuehne + Nagel International's (VTX:KNIN) recent performance, when its stock has declined 4.6% over the past month. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Kuehne + Nagel International's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Kuehne + Nagel International
How To 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 Kuehne + Nagel International is:
76% = CHF2.0b ÷ CHF2.7b (Based on the trailing twelve months to June 2023).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CHF1 worth of equity, the company was able to earn CHF0.76 in profit.
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. 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.
Kuehne + Nagel International's Earnings Growth And 76% ROE
To begin with, Kuehne + Nagel International has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 27% the company's ROE is quite impressive. So, the substantial 32% net income growth seen by Kuehne + Nagel International over the past five years isn't overly surprising.
As a next step, we compared Kuehne + Nagel International's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 46% in the same period.
Earnings growth is a huge factor in stock valuation. 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. Is KNIN fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Kuehne + Nagel International Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 59% (implying that it keeps only 41% of profits) for Kuehne + Nagel International suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.
Besides, Kuehne + Nagel International has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 69%. Regardless, Kuehne + Nagel International's ROE is speculated to decline to 26% despite there being no anticipated change in its payout ratio.
Summary
On the whole, we do feel that Kuehne + Nagel International has some positive attributes. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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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.
