Is the recent stock market performance of Kuehne + Nagel International AG (VTX: KNIN) influenced by its fundamentals?
Kuehne + Nagel International (VTX: KNIN) stock has risen significantly by 19% in the past three months. We wonder if and what role company financials are playing in this price change, as a company’s long-term fundamentals usually dictate market outcomes. In particular, we will pay particular attention to the ROE of Kuehne + Nagel International today.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
See our latest analysis for Kuehne + Nagel International
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of Kuehne + Nagel International is:
34% = CHF 968 million ÷ CHF 2.9 billion (based on the last twelve months up to March 2021).
The “return” is the income the business has earned over the past year. This means that for every CHF 1 of equity, the company generated CHF 0.34 in profit.
What is the relationship between ROE and profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of profit growth and 34% ROE of Kuehne + Nagel International
For starters, Kuehne + Nagel International has a pretty high ROE, which is interesting. Second, even compared to the industry average of 7.0%, the company’s ROE is quite impressive. Despite this, Kuehne + Nagel International’s five-year net income growth was quite low, averaging only 3.5%. It’s a little unexpected from a company that has such a high rate of return. We believe that low growth, when returns are high enough, could be the result of certain circumstances such as low profit retention or misallocation of capital.
As a next step, we compared the net income growth of Kuehne + Nagel International with the industry and were disappointed to see that the growth of the company is lower than the industry average growth of 12% over the course of the same period.
Profit growth is an important metric to consider when valuing a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or worrisome. Is Kuehne + Nagel International just valued compared to other companies? These 3 evaluation measures could help you decide.
Is Kuehne + Nagel International using its retained earnings efficiently?
The high three-year median payout rate of 89% (i.e. the company only keeps 11% of its revenue) over the past three years for Kuehne + Nagel International suggests that earnings growth of the company was lower due to the disbursement of a majority of its earnings.
In addition, Kuehne + Nagel International has paid dividends over a period of at least ten years, which means that the management of the company is committed to paying dividends even if it means little to no growth in earnings. Estimates from existing analysts suggest that the company’s future payout ratio is expected to drop to 64% over the next three years. Despite the lower expected payout ratio, the company’s ROE is not expected to change much.
All in all, it seems that Kuehne + Nagel International has positive aspects for its business. However, although the company has a high ROE, its profit growth figure is quite disappointing. This can be attributed to the fact that it only reinvests a small portion of its profits and pays the rest as dividends. That said, looking at current analysts’ estimates, we were concerned that while the company has increased profits in the past, analysts expect its profits to decline in the future. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to be redirected to our business analyst forecasts page.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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