It is hard to get excited after looking at Kulmbacher Brauerei Aktien-Gesellschaft's (MUN:KUL) recent performance, when its stock has declined 11% over the past month. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Kulmbacher Brauerei Aktien-Gesellschaft'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Kulmbacher Brauerei Aktien-Gesellschaft

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 Kulmbacher Brauerei Aktien-Gesellschaft is:

11% = €8.6m ÷ €81m (Based on the trailing twelve months to December 2022).

The 'return' is the yearly profit. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.11 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Kulmbacher Brauerei Aktien-Gesellschaft's Earnings Growth And 11% ROE

At first glance, Kulmbacher Brauerei Aktien-Gesellschaft seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 8.9%. Despite this, Kulmbacher Brauerei Aktien-Gesellschaft's five year net income growth was quite flat over the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital.

We then compared Kulmbacher Brauerei Aktien-Gesellschaft's performance with the industry and found that the company has shrunk its earnings at a slower rate than the industry earnings which has seen its earnings shrink by 5.5% in the same period. This does appease the negative sentiment around the company to a certain extent.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Kulmbacher Brauerei Aktien-Gesellschaft fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Kulmbacher Brauerei Aktien-Gesellschaft Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 61% (implying that the company keeps only 39% of its income) of its business to reinvest into its business), most of Kulmbacher Brauerei Aktien-Gesellschaft's profits are being paid to shareholders, which explains the absence of growth in earnings.

Additionally, Kulmbacher Brauerei Aktien-Gesellschaft has paid dividends over a period of nine years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

Overall, we feel that Kulmbacher Brauerei Aktien-Gesellschaft 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. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Kulmbacher Brauerei Aktien-Gesellschaft and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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