Deutsche Post's (ETR:DPW) stock up by 4.4% over the past month. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Particularly, we will be paying attention to Deutsche Post's ROE today.
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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Deutsche Post is:
25% = €5.9b ÷ €24b (Based on the trailing twelve months to September 2022).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.25 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Deutsche Post's Earnings Growth And 25% ROE
First thing first, we like that Deutsche Post has an impressive ROE. Even when compared to the industry average of 22% the company's ROE is pretty decent. Therefore, it might not be wrong to say that the impressive five year 20% net income growth seen by Deutsche Post was probably achieved as a result of the high ROE.
We then performed a comparison between Deutsche Post's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 22% in the same period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. What is DPW worth today? The intrinsic value infographic in our free research report helps visualize whether DPW is currently mispriced by the market.
Is Deutsche Post Efficiently Re-investing Its Profits?
Deutsche Post's three-year median payout ratio is a pretty moderate 44%, meaning the company retains 56% of its income. By the looks of it, the dividend is well covered and Deutsche Post is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Moreover, Deutsche Post is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 51%. Regardless, Deutsche Post's ROE is speculated to decline to 19% despite there being no anticipated change in its payout ratio.
In total, we are pretty happy with Deutsche Post's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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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