Braime Group (LON:BMT) stock is up 16% in the past month. However, we decided to pay attention to the fundamentals of the company which do not seem to give a clear indication of the financial health of the company. In this article, we have decided to focus on Braime Group’s ROE.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
See our latest analysis for Braime Group
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Braime Group is:
4.8% = UK£750,000 ÷ UK£16 million (based on trailing 12 months to December 2021).
The “return” is the annual profit. One way to conceptualize this is that for every pound of share capital it has, the company has made a profit of 0.05 pounds.
Why is ROE important for earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of Braime Group earnings growth and ROE of 4.8%
When you first look at it, Braime Group’s ROE doesn’t look so appealing. Then, compared to the industry average ROE of 15%, the company’s ROE leaves us even less excited. Therefore, it may not be wrong to say that the 9.3% drop in net profit over five years that the Braime Group saw was probably the result of a lower ROE. We believe there could also be other aspects that negatively influence the company’s earnings outlook. For example, it is possible that the company has misallocated capital or that the company has a very high payout ratio.
However, when we compared the growth of Braime Group with the industry, we found that although the company’s earnings declined, the industry experienced earnings growth of 9.5% over the same period. It’s quite worrying.
Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. Is the Braime group correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Does the Braime Group use its profits efficiently?
When we piece together Braime Group’s low three-year median payout ratio of 15% (where it retains 85% of its earnings), calculated for the last three-year period, we are intrigued by the lack of growth. The low payout should mean that the company keeps most of its profits and therefore should see some growth. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.
Furthermore, the Braime Group has paid dividends over a period of at least ten years, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of company growth. ‘company.
All in all, we are a little mixed on Braime Group’s performance. Although the company has a high earnings retention rate, its low rate of return is likely hampering its earnings growth. In conclusion, we would proceed with caution with this business and one way to do that would be to review the risk profile of the business. Our risk dashboard would have the 3 risks we identified for Braime Group.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.