Does weak fundamentals for Berry Corporation (NASDAQ:BRY) mean the market could correct its stock price?

Berry Inc (NASDAQ:BRY) has had a strong run in the stock market with a significant 29% rise in its stock over the past month. However, we wanted to take a closer look at its main financial indicators because the markets generally pay for long-term fundamentals, and in this case, they do not look very promising. In particular, we’ll be paying attention to Berry’s ROE today.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

See our latest analysis for Berry

How is ROE calculated?

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 Berry is:

0.8% = $5.2m ÷ $641m (based on trailing 12 months to June 2022).

The “return” is the annual profit. Another way to think about this is that for every dollar of equity, the company was able to make a profit of $0.01.

What does ROE have to do with earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. 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.

Berry earnings growth and ROE of 0.8%

As you can see, Berry’s ROE seems quite low. Even compared to the industry average ROE of 27%, the company’s ROE is pretty dismal. For this reason, Berry’s 7.6% decline in net income over five years is not surprising given its lower ROE. We believe there could also be other aspects that negatively influence the company’s earnings outlook. For example, the company has misallocated capital or the company has a very high payout ratio.

Moreover, even relative to the industry, which has cut profits at a rate of 4.4% over the same period, we found Berry’s performance to be quite disappointing, as it suggests the company cut profits at a faster rate than the industry.

NasdaqGS:BRY Past Earnings Growth August 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. This will help him determine if the future of the stock looks bright or ominous. Is Berry correctly valued compared to other companies? These 3 assessment metrics might help you decide.

Does Berry effectively reinvest its profits?

Berry’s very high LTM (or Trailing Twelve Month) payout ratio of 569% over the past three years suggests that the company pays its shareholders more than it earns, which explains the company’s declining earnings. Paying a dividend beyond their means is generally not sustainable in the long term. You can see the 3 risks we have identified for Berry by visiting our risk dashboard for free on our platform here.

Additionally, Berry has paid dividends over a four-year period, meaning the company’s management is instead focused on maintaining its dividend payouts regardless of declining earnings. Existing analyst estimates suggest the company’s future payout ratio is likely to drop to 8.2% over the next three years.

Summary

Overall, we would be extremely cautious before making a decision on Berry. More specifically, it has shown a rather unsatisfactory performance when it comes to earnings growth, and a low ROE and an equally low reinvestment rate seem to be at the root of this insufficient performance. That being the case, the latest forecasts from industry analysts show that analysts are expecting a huge improvement in the company’s earnings growth rate. 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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