With its stock down 6.6% over the past three months, it’s easy to overlook Bapcor (ASX:BAP). But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. Specifically, we decided to study Bapcor’s ROE in this article.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
See our latest analysis for Bapcor
How do you calculate return on equity?
the ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Bapcor is:
10% = AU$109 million ÷ AU$1.1 billion (based on trailing 12 months to December 2021).
The “yield” is the amount earned after tax over the last twelve months. This means that for every Australian dollar of equity, the company generated a profit of 0.10 Australian dollars.
What does ROE have to do with earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
Bapcor earnings growth and ROE of 10%
For starters, Bapcor seems to have a respectable ROE. Additionally, the company’s ROE is similar to the industry average of 10%. This likely partly explains Bapcor’s moderate 13% growth over the past five years, among other factors.
We then compared Bapcor’s net income growth with the industry and found that the company’s growth figure is below the industry average growth rate of 18% over the same period, which is a bit worrying.
Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. What is BAP worth today? The intrinsic value infographic in our free research report helps visualize whether BAP is currently being mispriced by the market.
Is Bapcor using its profits efficiently?
Although Bapcor has a three-year median payout ratio of 57% (meaning it retains 43% of earnings), the company has still had good earnings growth in the past, meaning its high payout ratio has not hindered its ability to grow.
Additionally, Bapcor paid dividends over a seven-year period. This shows that the company is committed to sharing profits with its shareholders. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out approximately 56% of its earnings over the next three years. As a result, the company’s future ROE is also not expected to change much, with analysts predicting an ROE of 12%.
Overall, we think Bapcor has positive attributes. Its earnings grew respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a fairly high rate of return. However, given the high ROE, we believe the company is reinvesting a small portion of its earnings. This could probably prevent the business from fully developing. That said, the company’s earnings growth is expected to slow, as expected in current analyst estimates. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.