KONE Oyj's's (HEL:KNEBV) stock is up by a considerable 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. Specifically, we decided to study KONE Oyj'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How To Calculate Return On Equity?
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 KONE Oyj is:
37% = €922m ÷ €2.5b (Based on the trailing twelve months to March 2020).
The 'return' is the profit over the last twelve months. That means that for every €1 worth of shareholders' equity, the company generated €0.37 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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 KONE Oyj's Earnings Growth And 37% ROE
First thing first, we like that KONE Oyj has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 9.3% which is quite remarkable. However, we are curious as to how the high returns still resulted in a flat growth for KONE Oyj in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.
We then compared KONE Oyj's net income growth with the industry and found that the average industry growth rate was 5.1% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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 KONE Oyj's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is KONE Oyj Making Efficient Use Of Its Profits?
With a high three-year median payout ratio of 77% (implying that the company keeps only 23% of its income) of its business to reinvest into its business), most of KONE Oyj's profits are being paid to shareholders, which explains the absence of growth in earnings.
Additionally, KONE Oyj 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 84% of its profits over the next three years. Accordingly, forecasts suggest that KONE Oyj's future ROE will be 32% which is again, similar to the current ROE.
Overall, we feel that KONE Oyj 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. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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This article by Simply Wall St is general in nature. 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. Thank you for reading.