Most readers would already know that B&M European Value Retail’s (LON:BME) stock increased by 4.7% 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 B&M European Value Retail’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 simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
Check out our latest analysis for B&M European Value Retail
How To 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 B&M European Value Retail is:
58% = UK£428m ÷ UK£733m (Based on the trailing twelve months to March 2021).
The ‘return’ is the amount earned after tax over the last twelve months. So, this means that for every £1 of its shareholder’s investments, the company generates a profit of £0.58.
Why Is ROE Important For Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. 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 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.
B&M European Value Retail’s Earnings Growth And 58% ROE
Firstly, we acknowledge that B&M European Value Retail has a significantly high ROE. Secondly, even when compared to the industry average of 29% the company’s ROE is quite impressive. Under the circumstances, B&M European Value Retail’s considerable five year net income growth of 22% was to be expected.
When you consider the fact that the industry earnings have shrunk at a rate of 1.7% in the same 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is BME fairly valued? This infographic on the company’s intrinsic value has everything you need to know.
Is B&M European Value Retail Making Efficient Use Of Its Profits?
B&M European Value Retail has a three-year median payout ratio of 38% (where it is retaining 62% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like B&M European Value Retail is reinvesting its earnings efficiently.
Besides, B&M European Value Retail has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to rise to 69% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.
Summary
In total, we are pretty happy with B&M European Value Retail’s performance. 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, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.
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.
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