Is Weakness In Briscoe Group Limited (NZSE:BGP) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

view original post

Briscoe Group (NZSE:BGP) has had a rough three months with its share price down 2.9%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Briscoe Group’s ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Briscoe Group

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Briscoe Group is:

33% = NZ$93m ÷ NZ$283m (Based on the trailing twelve months to August 2021).

The ‘return’ is the yearly profit. One way to conceptualize this is that for each NZ$1 of shareholders’ capital it has, the company made NZ$0.33 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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 Briscoe Group’s Earnings Growth And 33% ROE

To begin with, Briscoe Group has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 13% the company’s ROE is quite impressive. Probably as a result of this, Briscoe Group was able to see a decent net income growth of 6.5% over the last five years.

We then performed a comparison between Briscoe Group’s net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 7.4% in the same period.

past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Briscoe Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Briscoe Group Efficiently Re-investing Its Profits?

Briscoe Group has a significant three-year median payout ratio of 62%, meaning that it is left with only 38% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Additionally, Briscoe Group has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 70%. As a result, Briscoe Group’s ROE is not expected to change by much either, which we inferred from the analyst estimate of 30% for future ROE.

Summary

In total, we are pretty happy with Briscoe Group’s performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that’s not too bad. So far, we’ve only made a quick discussion around the company’s earnings growth. To gain further insights into Briscoe Group’s past profit growth, check out this visualization of past earnings, revenue and cash flows.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.