Yahoo Finance Bisalloy Steel Group Limited's (ASX:BIS) Stock's On An Uptrend: Are Strong Financials Guiding The Market?
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Most readers would already be aware that Bisalloy Steel Group's (ASX:BIS) stock increased significantly by 27% 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 Bisalloy Steel Group's ROE.
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.
See our latest analysis for Bisalloy Steel Group
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 Bisalloy Steel Group is:
11% = AU$4.1m ÷ AU$36m (Based on the trailing twelve months to December 2019).
The 'return' is the yearly profit. That means that for every A$1 worth of shareholders' equity, the company generated A$0.11 in profit.
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.
Bisalloy Steel Group's Earnings Growth And 11% ROE
To start with, Bisalloy Steel Group's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 12%. Consequently, this likely laid the ground for the impressive net income growth of 25% seen over the past five years by Bisalloy Steel Group. However, there could also be other drivers behind this growth. Such as - high earnings retention or an efficient management in place.
As a next step, we compared Bisalloy Steel Group's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 38% in the same period.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Bisalloy Steel Group is trading on a high P/E or a low P/E, relative to its industry.
Is Bisalloy Steel Group Efficiently Re-investing Its Profits?
Bisalloy Steel Group has a three-year median payout ratio of 49% (where it is retaining 51% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Bisalloy Steel Group is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Additionally, Bisalloy Steel Group has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders.
Conclusion
On the whole, we feel that Bisalloy Steel Group's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 2 risks we have identified for Bisalloy Steel Group by visiting our risks dashboard for free on our platform here.
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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