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WashTec AG (ETR:WSU) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

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With its stock down 28% over the past three months, it is easy to disregard WashTec (ETR:WSU). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on WashTec's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for WashTec

How To Calculate Return On Equity?

Return on equity 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 WashTec is:

26% = €22m ÷ €84m (Based on the trailing twelve months to December 2019).

The 'return' is the yearly profit. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.26 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

WashTec's Earnings Growth And 26% ROE

First thing first, we like that WashTec has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 10% which is quite remarkable. Probably as a result of this, WashTec was able to see a decent net income growth of 8.7% over the last five years.

As a next step, we compared WashTec'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 11% in the same period.

XTRA:WSU Past Earnings Growth May 1st 2020
XTRA:WSU Past Earnings Growth May 1st 2020

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). Doing so will help them establish if the stock's future looks promising or ominous. Is WSU fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is WashTec Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 86% (or a retention ratio of 14%) for WashTec suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, WashTec has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with 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 74%. Still, forecasts suggest that WashTec's future ROE will rise to 32% even though the the company's payout ratio is not expected to change by much.

Conclusion

On the whole, we do feel that WashTec has some positive attributes. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.