Declining Stock and Solid Fundamentals: Is The Market Wrong About Beacon Lighting Group Limited (ASX:BLX)?
Beacon Lighting Group (ASX:BLX) has had a rough three months with its share price down 11%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Beacon Lighting Group's ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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 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 Beacon Lighting Group is:
30% = AU$41m ÷ AU$134m (Based on the trailing twelve months to June 2022).
The 'return' is the profit over the last twelve months. That means that for every A$1 worth of shareholders' equity, the company generated A$0.30 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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 30% ROE
First thing first, we like that Beacon Lighting Group has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 21% also doesn't go unnoticed by us. So, the substantial 21% net income growth seen by Beacon Lighting Group over the past five years isn't overly surprising.
As a next step, we compared Beacon Lighting Group's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 21% in the same period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is BLX fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Beacon Lighting Group Using Its Retained Earnings Effectively?
Beacon Lighting Group has a significant three-year median payout ratio of 52%, meaning the company only retains 48% of its income. This implies that the company has been able to achieve high 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 eight years of paying a dividend. 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 54%. Regardless, Beacon Lighting Group's ROE is speculated to decline to 22% despite there being no anticipated change in its payout ratio.
Summary
On the whole, we feel that Beacon Lighting Group's performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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.
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