Are Robust Financials Driving The Recent Rally In Bytes Technology Group plc's (LON:BYIT) Stock?
Most readers would already be aware that Bytes Technology Group's (LON:BYIT) stock increased significantly by 16% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Bytes Technology 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Bytes Technology Group
How Is ROE Calculated?
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 Bytes Technology Group is:
74% = UK£44m ÷ UK£60m (Based on the trailing twelve months to August 2023).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.74 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
A Side By Side comparison of Bytes Technology Group's Earnings Growth And 74% ROE
Firstly, we acknowledge that Bytes Technology Group has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 8.5% which is quite remarkable. Under the circumstances, Bytes Technology Group's considerable five year net income growth of 21% was to be expected.
As a next step, we compared Bytes Technology 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 20% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for BYIT? You can find out in our latest intrinsic value infographic research report.
Is Bytes Technology Group Making Efficient Use Of Its Profits?
Bytes Technology Group's three-year median payout ratio is a pretty moderate 44%, meaning the company retains 56% of its income. So it seems that Bytes Technology Group is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.
While Bytes Technology Group has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with 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 46%. Regardless, Bytes Technology Group's ROE is speculated to decline to 58% despite there being no anticipated change in its payout ratio.
Summary
On the whole, we feel that Bytes Technology Group's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.
