Is B&M European Value Retail S.A.'s (LON:BME) Latest Stock Performance A Reflection Of Its Financial Health?

B&M European Value Retail (LON:BME) has had a great run on the share market with its stock up by a significant 10% over the last 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. Specifically, we decided to study B&M European Value Retail'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for B&M European Value Retail

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for B&M European Value Retail is:

30% = UK£298m ÷ UK£993m (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.30.

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.

B&M European Value Retail's Earnings Growth And 30% ROE

To begin with, B&M European Value Retail has a pretty high ROE which is interesting. Further, even comparing with the industry average if 31%, the company's ROE is quite respectable. So, B&M European Value Retail's moderate 17% growth over the past five years was probably backed by the high ROE.

Next, on comparing with the industry net income growth, we found that B&M European Value Retail's growth is quite high when compared to the industry average growth of 0.1% in the same period, which is great to see.

past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is BME worth today? The intrinsic value infographic in our free research report helps visualize whether BME is currently mispriced by the market.

Is B&M European Value Retail Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 38% (implying that the company retains 62% of its profits), it seems that B&M European Value Retail is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, B&M European Value Retail has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. 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 35%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 33%.

Summary

Overall, we are quite pleased with B&M European Value Retail'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. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings 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.

This article by Simply Wall St is general in nature. 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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