BATM Advanced Communications’ (LON:BVC) stock is up by 7.2% over the past three months. Given its impressive performance, we decided to study the company’s key financial indicators as a company’s long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to BATM Advanced Communications’ ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Do You Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for BATM Advanced Communications is:
17% = US$22m ÷ US$128m (Based on the trailing twelve months to June 2021).
The ‘return’ is the profit over the last twelve months. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.17 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
A Side By Side comparison of BATM Advanced Communications’ Earnings Growth And 17% ROE
To begin with, BATM Advanced Communications seems to have a respectable ROE. Further, the company’s ROE compares quite favorably to the industry average of 9.6%. Probably as a result of this, BATM Advanced Communications was able to see an impressive net income growth of 82% over the last five years. We believe that there might also be other aspects that are positively influencing the company’s earnings growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.
We then compared BATM Advanced Communications’ net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 25% in the same period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is BATM Advanced Communications fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is BATM Advanced Communications Using Its Retained Earnings Effectively?
Given that BATM Advanced Communications doesn’t pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
Overall, we are quite pleased with BATM Advanced Communications’ performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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. We provide commentary based on historical data and analyst forecasts only using an 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 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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