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Could The Market Be Wrong About VERBUND AG (VIE:VER) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at VERBUND's (VIE:VER) recent performance, when its stock has declined 17% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study VERBUND's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for VERBUND

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

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

9.0% = €618m ÷ €6.8b (Based on the trailing twelve months to March 2020).

The 'return' is the income the business earned over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.09 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learnt 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

VERBUND's Earnings Growth And 9.0% ROE

To start with, VERBUND's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 8.3%. This probably goes some way in explaining VERBUND's significant 21% net income growth over the past five years amongst other factors. However, there could also be other drivers behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that VERBUND's growth is quite high when compared to the industry average growth of 7.8% in the same period, which is great to see.

WBAG:VER Past Earnings Growth May 26th 2020
WBAG:VER Past Earnings Growth May 26th 2020

Earnings growth is a huge factor in stock valuation. 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. Is VER fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is VERBUND Making Efficient Use Of Its Profits?

VERBUND's three-year median payout ratio is a pretty moderate 39%, meaning the company retains 61% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like VERBUND is reinvesting its earnings efficiently.

Besides, VERBUND has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 52% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Summary

In total, we are pretty happy with VERBUND'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, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.

This article by Simply Wall St is general in nature. 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. Thank you for reading.