With its stock down 13% over the past month, it’s easy to overlook Blackmores (ASX: BKL). Since stock prices are usually determined by a company’s long-term fundamentals, which in this case seem quite weak, we decided to study the key financial indicators of the company. In this article, we have decided to focus on Blackmores ROE.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
Check out our latest analysis for Blackmores
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Blackmores is:
7.6% = A $ 29 million ÷ A $ 379 million (based on the last twelve months to June 2021).
The “return” is the amount earned after tax over the past twelve months. One way to conceptualize this is that for every Australian dollar of registered capital it has, the company has made 0.08 Australian dollars in profit.
What does ROE have to do with profit growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
A side-by-side comparison of Blackmores profit growth and 7.6% ROE
At first glance, Blackmores’ ROE isn’t much to say. We then compared the company’s ROE to that of the industry as a whole and were disappointed to see that the ROE is 13% below the industry average. Given the circumstances, the significant 31% drop in bottom line seen by Blackmores over the past five years is not surprising. We believe there could also be other aspects that negatively influence the company’s earnings outlook. Such as – low profit retention or misallocation of capital.
In the next step, we compared the performance of Blackmores with the industry and found that the performance of Blackmores is depressing even when compared to the industry, which cut its profits by 11% during the same period, which is slower than the business.
Profit growth is a huge factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. What is BKL worth today? The intrinsic value infographic in our free research report helps to visualize whether BKL is currently poorly valued by the market.
Does Blackmores Effectively Reinvest Its Profits?
With a high three-year median payout rate of 60% (implying that 40% of profits are retained), most of Blackmores’ profits go to shareholders, which explains the company’s decline in profits. With very little to reinvest in the business, earnings growth is far from likely.
Additionally, Blackmores has paid dividends over a period of at least ten years, suggesting that sustaining dividend payments is far more important to management, even if it comes at the expense of growing the business. . After studying the latest consensus data from analysts, we found that the company is expected to continue to pay out around 52% of its profits over the next three years. However, Blackmores’ ROE is expected to increase to 17% although there is no expected change in its payout ratio.
Overall, Blackmores’ performance is quite disappointing. Due to its low ROE and lack of reinvestment in the business, the company recorded a disappointing rate of profit growth. That said, looking at current analysts’ estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.