Most readers would already know that Best of the Best’s (LON:BOTB) stock increased by 7.1% over the past three months. Given its impressive performance, we decided to study the company’s key financial indicators as a company’s long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Best of the Best’s ROE today.
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.
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 Best of the Best is:
53% = UK£4.3m ÷ UK£8.1m (Based on the trailing twelve months to April 2022).
The ‘return’ is the amount earned after tax over the last twelve months. So, this means that for every £1 of its shareholder’s investments, the company generates a profit of £0.53.
Why Is ROE Important For 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.
A Side By Side comparison of Best of the Best’s Earnings Growth And 53% ROE
To begin with, Best of the Best has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 13% also doesn’t go unnoticed by us. So, the substantial 35% net income growth seen by Best of the Best over the past five years isn’t overly surprising.
Given that the industry shrunk its earnings at a rate of 16% in the same period, the net income growth of the company is quite impressive.
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 Best of the Best fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Best of the Best Efficiently Re-investing Its Profits?
Best of the Best has a really low three-year median payout ratio of 5.2%, meaning that it has the remaining 95% left over to reinvest into its business. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.
Moreover, Best of the Best is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to rise to 12% over the next three years. Therefore, the expected rise in the payout ratio explains why the company’s ROE is expected to decline to 36% over the same period.
Overall, we are quite pleased with Best of the Best’s performance. 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. 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.
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