Yahoo Finance Borussia Dortmund GmbH & Co. Kommanditgesellschaft auf Aktien's (ETR:BVB) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?
With its stock down 3.9% over the past three months, it is easy to disregard Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien (ETR:BVB). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien
How Do You 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 Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien is:
11% = €39m ÷ €353m (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.11 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
A Side By Side comparison of Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's Earnings Growth And 11% ROE
At first glance, Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien seems to have a decent ROE. Yet, the fact that the company's ROE is lower than the industry average of 18% does temper our expectations. However, the moderate 5.7% net income growth seen by Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien over the past five years is definitely a positive. So, there might be other aspects that are positively influencing earnings growth. For instance, the company has a low payout ratio or is being managed efficiently. Bear in mind, the company does have a respectable level of ROE. It is just that the industry ROE is higher. So this also does lend some color to the fairly high earnings growth seen by the company.
As a next step, we compared Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien'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 33% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien is trading on a high P/E or a low P/E, relative to its industry.
Is Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien Making Efficient Use Of Its Profits?
Given that Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
Summary
In total, it does look like Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien has some positive aspects to its business. Particularly, its earnings have grown respectably as we saw earlier, which was likely achieved due to the company reinvesting most of its earnings at a decent rate of return, to grow its business. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.
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.
