Yahoo Finance Are Bright Horizons Family Solutions Inc.'s (NYSE:BFAM) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?
With its stock down 30% over the past three months, it is easy to disregard Bright Horizons Family Solutions (NYSE:BFAM). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on Bright Horizons Family Solutions' 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Check out our latest analysis for Bright Horizons Family Solutions
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 Bright Horizons Family Solutions is:
7.1% = US$83m ÷ US$1.2b (Based on the trailing twelve months to March 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 $0.07.
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. 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. 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.
Bright Horizons Family Solutions' Earnings Growth And 7.1% ROE
At first glance, Bright Horizons Family Solutions' ROE doesn't look very promising. However, its ROE is similar to the industry average of 8.0%, so we won't completely dismiss the company. Having said that, Bright Horizons Family Solutions' five year net income decline rate was 19%. Remember, the company's ROE is a bit low to begin with. Therefore, the decline in earnings could also be the result of this.
That being said, we compared Bright Horizons Family Solutions' performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 11% in the same period.
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. This then helps them determine if the stock is placed for a bright or bleak future. Is BFAM fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Bright Horizons Family Solutions Making Efficient Use Of Its Profits?
Bright Horizons Family Solutions doesn't pay any dividend, meaning that potentially all of its profits are being reinvested in the business, which doesn't explain why the company's earnings have shrunk if it is retaining all of its profits. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Summary
Overall, we have mixed feelings about Bright Horizons Family Solutions. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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.
