B&S Group SA (AMS:BSGR) The stock is down but the fundamentals look good: will the market correct the stock price in the future?

With its stock down 10% in the past three months, it’s easy to overlook the B&S Group (AMS: BSGR). But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In this article, we decided to focus on the ROE of B&S Group.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simpler terms, it measures a company’s profitability relative to equity.

See our latest analysis for B&S Group

How is ROE calculated?

the ROE formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for the B&S group is:

18% = €55m ÷ €303m (based on the last twelve months to December 2021).

The “yield” is the amount earned after tax over the last twelve months. This means that for every €1 of equity, the company generated €0.18 of profit.

What is the relationship between ROE and 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. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

A side-by-side comparison of B&S Group earnings growth and 18% ROE

For starters, B&S Group seems to have a respectable ROE. And comparing with the industry, we found that the industry average ROE is similar at 17%. However, while the B&S Group has a fairly respectable ROE, its five-year net income decline rate was 21%. So there could be other aspects that could explain this. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.

However, when we compared the growth of the B&S Group with the industry, we found that although company earnings declined, the industry experienced earnings growth of 10.0% over the same period. It’s quite worrying.

ENXTAM: BSGR Past Earnings Growth May 10, 2022

Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. A 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 outlook. Thus, you might want to check whether the B&S group is trading on a high P/E or on a low P/E, relative to its sector.

Does B&S Group use its retained earnings effectively?

Despite a three-year normal median payout ratio of 33% (i.e. a retention rate of 67%), the fact that B&S Group earnings have declined is quite puzzling. It seems that there could be other reasons for the lack in this regard. For example, the business might be in decline.

In addition, the B&S Group has paid dividends over a four-year period, suggesting that maintaining dividend payments is preferred by management, even if earnings are down. After reviewing the latest analyst consensus data, we found that the company’s future payout ratio is expected to reach 41% over the next three years. However, the company’s ROE is not expected to change much despite the higher expected payout ratio.

Summary

All in all, it seems that B&S Group has positive aspects in its business. However, given the high ROE and strong earnings retention, we would expect the company to post strong earnings growth, but that is not the case here. This suggests that there might be an external threat to the business, which is hampering its growth. That said, looking at current analyst estimates, we found that the company’s earnings growth rate should see a huge improvement. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

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.

About Ian Crawford

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