Fresenius Medical Care KGaA (ETR:FME) has had a great run on the share market with its stock up by a significant 9.9% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Fresenius Medical Care KGaA’s ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company’s success at turning shareholder investments into profits.
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 Fresenius Medical Care KGaA is:
12% = €1.4b ÷ €12b (Based on the trailing twelve months to December 2020).
The ‘return’ is the yearly profit. So, this means that for every €1 of its shareholder’s investments, the company generates a profit of €0.12.
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. 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.
Fresenius Medical Care KGaA’s Earnings Growth And 12% ROE
To start with, Fresenius Medical Care KGaA’s ROE looks acceptable. On comparing with the average industry ROE of 8.4% the company’s ROE looks pretty remarkable. Probably as a result of this, Fresenius Medical Care KGaA was able to see a decent growth of 5.4% over the last five years.
Next, on comparing Fresenius Medical Care KGaA’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 5.4% 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). Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Fresenius Medical Care KGaA’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Fresenius Medical Care KGaA Making Efficient Use Of Its Profits?
Fresenius Medical Care KGaA has a three-year median payout ratio of 27%, which implies that it retains the remaining 73% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.
Besides, Fresenius Medical Care KGaA 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 28%. As a result, Fresenius Medical Care KGaA’s ROE is not expected to change by much either, which we inferred from the analyst estimate of 10% for future ROE.
Overall, we are quite pleased with Fresenius Medical Care KGaA’s performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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 company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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