Most readers would already be aware that KWS SAAT SE KGaA's (ETR:KWS) stock increased significantly by 18% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention toKWS SAAT SE KGaA'sROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for KWS SAAT SE KGaA

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for KWS SAAT SE KGaA is:

9.2% = €79m ÷ €859m (Based on the trailing twelve months to December 2019).

The 'return' is the yearly profit. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.09.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learnt 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.

KWS SAAT SE KGaA's Earnings Growth And 9.2% ROE

At first glance, KWS SAAT SE KGaA seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 9.2%. This certainly adds some context to KWS SAAT SE KGaA's moderate 12% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that the growth figure reported by KWS SAAT SE KGaA compares quite favourably to the industry average, which shows a decline of 1.7% in the same period.

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. Doing so will help them establish if the stock's future looks promising or ominous. 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 tocheck if KWS SAAT SE KGaA is trading on a high P/E or a low P/E, relative to its industry.

Is KWS SAAT SE KGaA Efficiently Re-investing Its Profits?

In KWS SAAT SE KGaA's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 23% (or a retention ratio of 77%), which suggests that the company is investing most of its profits to grow its business.

Moreover, KWS SAAT SE KGaA 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 21% of its profits over the next three years. As a result, KWS SAAT SE KGaA's ROE is not expected to change by much either, which we inferred from the analyst estimate of 11% for future ROE.

Summary

On the whole, we feel that KWS SAAT SE KGaA's performance has been quite good. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.

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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.