NÜRNBERGER Beteiligungs-AG's (ETR:NBG6) Stock Financial Prospects Look Bleak: Should Shareholders Be Prepared For A Share Price Correction?
Most readers would already know that NÜRNBERGER Beteiligungs-AG's (ETR:NBG6) stock increased by 1.3% over the past week. However, its weak financial performance indicators makes us a bit doubtful if that trend could continue. Particularly, we will be paying attention to NÜRNBERGER Beteiligungs-AG'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for NÜRNBERGER Beteiligungs-AG
How Do You 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 NÜRNBERGER Beteiligungs-AG is:
7.2% = €70m ÷ €964m (Based on the trailing twelve months to December 2022).
The 'return' is the amount earned after tax over the last twelve months. That means that for every €1 worth of shareholders' equity, the company generated €0.07 in profit.
What Has ROE Got To Do With 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. 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.
A Side By Side comparison of NÜRNBERGER Beteiligungs-AG's Earnings Growth And 7.2% ROE
When you first look at it, NÜRNBERGER Beteiligungs-AG'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. For this reason, NÜRNBERGER Beteiligungs-AG's five year net income decline of 5.6% is not surprising given its lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For example, it is possible that the business has allocated capital poorly or that the company has a very high payout ratio.
However, when we compared NÜRNBERGER Beteiligungs-AG's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 3.5% in the same period. This is quite worrisome.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is NÜRNBERGER Beteiligungs-AG fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is NÜRNBERGER Beteiligungs-AG Efficiently Re-investing Its Profits?
With a high three-year median payout ratio of 56% (implying that 44% of the profits are retained), most of NÜRNBERGER Beteiligungs-AG's profits are being paid to shareholders, which explains the company's shrinking earnings. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. You can see the 2 risks we have identified for NÜRNBERGER Beteiligungs-AG by visiting our risks dashboard for free on our platform here.
Additionally, NÜRNBERGER Beteiligungs-AG 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.
Conclusion
On the whole, NÜRNBERGER Beteiligungs-AG's performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.
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