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Is Badger Infrastructure Solutions Ltd.'s (TSE:BDGI) Stock Price Struggling As A Result Of Its Mixed Financials?

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Badger Infrastructure Solutions (TSE:BDGI) has had a rough three months with its share price down 17%. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. In this article, we decided to focus on Badger Infrastructure Solutions' ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Badger Infrastructure Solutions

How Do You Calculate Return On Equity?

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 Badger Infrastructure Solutions is:

1.6% = CA$4.7m ÷ CA$306m (Based on the trailing twelve months to March 2021).

The 'return' is the profit over the last twelve months. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.02.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Badger Infrastructure Solutions' Earnings Growth And 1.6% ROE

It is hard to argue that Badger Infrastructure Solutions' ROE is much good in and of itself. Even compared to the average industry ROE of 11%, the company's ROE is quite dismal. Hence, the flat earnings seen by Badger Infrastructure Solutions over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that Badger Infrastructure Solutions' reported growth was lower than the industry growth of 8.5% in the same period, which is not something we like to see.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. One 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 prospects. So, you may want to check if Badger Infrastructure Solutions is trading on a high P/E or a low P/E, relative to its industry.

Is Badger Infrastructure Solutions Using Its Retained Earnings Effectively?

In spite of a normal three-year median payout ratio of 30% (or a retention ratio of 70%), Badger Infrastructure Solutions hasn't seen much growth in its earnings. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, Badger Infrastructure Solutions has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 33%.

Conclusion

Overall, we have mixed feelings about Badger Infrastructure Solutions. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

This article by Simply Wall St is general in nature. 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.

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