Is Beacon Lighting Group Limited's (ASX:BLX) Stock's Recent Performance A Reflection Of Its Financial Health?
Most readers would already know that Beacon Lighting Group's (ASX:BLX) stock increased by 9.2% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Beacon Lighting Group's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Beacon Lighting 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 Beacon Lighting Group is:
23% = AU$34m ÷ AU$149m (Based on the trailing twelve months to June 2023).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.23.
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.
Beacon Lighting Group's Earnings Growth And 23% ROE
To begin with, Beacon Lighting Group has a pretty high ROE which is interesting. Additionally, a comparison with the average industry ROE of 20% also portrays the company's ROE in a good light. So, Beacon Lighting Group's moderate 19% growth over the past five years was probably backed by the high ROE.
We then performed a comparison between Beacon Lighting Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 20% in the same 5-year period.
Earnings growth is an important metric to consider when valuing a stock. 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 Beacon Lighting Group fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Beacon Lighting Group Efficiently Re-investing Its Profits?
Beacon Lighting Group has a significant three-year median payout ratio of 52%, meaning that it is left with only 48% 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.
Moreover, Beacon Lighting Group is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 54%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 19%.
Conclusion
In total, we are pretty happy with Beacon Lighting 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.
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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.
