Is Knowles Corporation’s (NYSE:KN) Stock Price Struggling As A Result Of Its Mixed Financials?
It is hard to get excited after looking at Knowles’ (NYSE:KN) recent performance, when its stock has declined 25% over the past three months. We, however decided to study the company’s financials to determine if they have got anything to do with the price decline. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company’s financial performance. Particularly, we will be paying attention to Knowles’ ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Knowles is:
3.1% = US$23m ÷ US$756m (Based on the trailing twelve months to December 2024).
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 $0.03.
View our latest analysis for Knowles
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.
It is quite clear that Knowles’ ROE is rather low. Not just that, even compared to the industry average of 10%, the company’s ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 16% seen by Knowles over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.
So, as a next step, we compared Knowles’ performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 13% over the last few years.
