Are fundamentals playing a role in driving Klingelnberg AG (VTX:KLIN) stock's recent rise?

Most readers already know that Klingelnberg (VTX:KLIN) stock is up 3.6% over the past three months. Given that stock prices are usually aligned with a company's financial performance over the long term, we decided to investigate whether the company's strong financials played a role in the recent price movement. Specifically, we decided to examine Klingelnberg's ROE in this article.

Return on equity or ROE is a test of how effectively a company increases its value and manages investors' money. In simple terms, it measures the profitability of a company in relation to its equity capital.

Check out our latest analysis for Klingelnberg

How do you calculate return on equity?

Return on equity can be calculated using the formula:

Return on equity = net profit (from continuing operations) ÷ equity

So, based on the formula above, the ROE for Klingelnberg is:

19% = €23m ÷ €126m (Based on trailing twelve months to September 2023).

The “return” is the annual profit. Another way to imagine it is that for every CHF 1 worth of equity, the company was able to generate a profit of CHF 0.19.

Why is ROE important for earnings growth?

So far we have learned that ROE measures how efficiently a company generates its profits. Based on how much of its profits the company reinvests or “retains”, we can then evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher a company's growth rate will be compared to companies that don't necessarily share these characteristics.

Klingelnberg's earnings growth and 19% ROE

First of all, Klingelnberg's ROE looks acceptable. Even compared to the industry average of 18%, the company's ROE looks pretty decent. Klingelnberg's decent returns are not reflected in Klingelnberg's mediocre five-year net income growth of 4.7% on average. Some likely reasons that could keep earnings growth low include a high payout ratio of the company or poor capital allocation.

Next, when comparing with the industry's net income growth, we found that Klingelnberg's reported growth was lower than the industry growth of 8.1% over the past few years, which we don't like to see.

Earnings growth is an important factor in stock valuation. The investor should try to find out whether the expected growth or decline in earnings (as the case may be) is priced in. This then helps him determine whether the stock is suitable for a bright or bleak future. If you're wondering about Klingelnberg's valuation, take a look at this measure of the company's price-to-earnings ratio compared to the industry.

The story goes on

Does Klingelnberg use its profits efficiently?

Klingelnberg's low median payout ratio of 16% (or retention ratio of 84%) over three years should mean that the company is retaining the majority of its profits to fuel its growth. However, low earnings growth does not reflect this fact. Therefore, there could be other reasons that explain the deficiency in this regard. For example, business could be declining.

Additionally, Klingelnberg has paid dividends over a five-year period, meaning the company's management is committed to paying dividends even if it means little to no earnings growth.

Diploma

Overall, we think Klingelnberg has some positive qualities. However, given its high ROE and high profit retention, we would expect the company to deliver strong earnings growth, but that is not the case here. This suggests that there may be an external threat to the company that is hindering its growth. With this in mind, the latest industry analyst forecasts suggest that the company's earnings growth is likely to slow. To know more about the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.