freenet AG (ETR:FNTN) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?
Freenet AG's stock has declined 1.9% recently, but its fundamentals, particularly a 19% Return on Equity (ROE), suggest potential for long-term growth. The company's ROE is significantly higher than the industry average of 9.3%, contributing to a 10% earnings growth over the past five years, despite industry declines. However, a high payout ratio of 116% indicates that it pays out more to shareholders than it earns. Analysts expect the payout ratio to decrease to 88% in the next three years, but earnings growth may slow down. Overall, freenet shows positive factors but needs to improve profit reinvestment.
It is hard to get excited after looking at freenet's (ETR:FNTN) recent performance, when its stock has declined 1.9% over the past week. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to freenet's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.
How Do You Calculate Return On Equity?
ROE 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 freenet is:
19% = €259m ÷ €1.4b (Based on the trailing twelve months to June 2025).
The 'return' is the profit over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.19.
View our latest analysis for freenet
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
freenet's Earnings Growth And 19% ROE
At first glance, freenet seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 9.3%. Probably as a result of this, freenet was able to see a decent growth of 10% over the last five years.
When you consider the fact that the industry earnings have shrunk at a rate of 6.7% in the same 5-year period, the company's net income growth is pretty remarkable.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is freenet fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is freenet Efficiently Re-investing Its Profits?
freenet's high three-year median payout ratio of 116% suggests that the company is paying out more to its shareholders than what it is making. Still the company's earnings have grown respectably. It would still be worth keeping an eye on that high payout ratio, if for some reason the company runs into problems and business deteriorates.
Besides, freenet has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 88% over the next three years. However, the company's ROE is not expected to change by much despite the lower expected payout ratio.
Conclusion
Overall, we feel that freenet certainly does have some positive factors to consider. Especially the growth in earnings which was backed by an impressive ROE. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be negligible. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.
