Big Technologies (LON:BIG) has had a great run in the stock market, with its shares up a whopping 23% over the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health typically drives market results. Specifically, we decided to examine Big Technologies’ ROE in this article.
Return on Equity, or ROE, is a key metric used to assess how efficiently a company’s management is using the company’s capital. In short, ROE shows the profit each dollar generates in relation to its shareholders’ investments.
Try this chances and risks within the GB Commercial Services industry.
How do you calculate return on equity?
The return on equity can be calculated using the following formula:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Big Technologies is:
17% = UK£15m ÷ UK£87m (Based on trailing 12 months to June 2022).
The “return” is the annual profit. This means that for every £1 of equity the company makes £0.17 in profit.
What is the relationship between ROE and earnings growth?
We have already established that ROE serves as an efficient profitable measure of a company’s future profits. Based on how much of its profits the company chooses to reinvest, or “retain,” we are then able to assess a company’s future ability to generate profits. Assuming all else remains the same, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
A head-to-head comparison of Big Technologies’ earnings growth and 17% ROE
First off, Big Technologies appears to have a respectable ROE. Compared to the industry average ROE of 7.9%, the company’s ROE looks pretty remarkable. That likely laid the groundwork for Big Technologies’ significant 40% net earnings growth over the past five years. But there could also be other reasons behind this growth. For example, it’s possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.
Next, when comparing the industry’s net income growth, we found that the growth number reported by Big Technologies compares fairly favorably to the industry average, which shows a 3.1% decline over the same period.
Earnings growth is an important factor in stock valuation. Next, investors need to determine whether expected earnings growth, or lack thereof, is already embedded in the stock price. That way they have an idea if the stock is headed into clear blue waters or if swampy waters await them. Is Big Technologies fairly valued compared to other companies? These 3 evaluation criteria could help you with the decision.
Is Big Technologies using its retained earnings effectively?
Big Technologies doesn’t pay a dividend to its shareholders, which means the company has reinvested all of its profits into the business. This is likely the reason for the high earnings growth mentioned above.
Overall, we’re quite happy with Big Technologies’ performance. In particular, it’s great to see that the company has invested heavily in its business and has resulted in significant earnings growth along with a high rate of return. Against this backdrop, the latest forecasts from industry analysts indicate that the company’s earnings growth is expected to slow. To learn more about the company’s future earnings growth projections, take a look free Report on analyst forecasts for the company to learn more.
The assessment is complex, but we help to simplify it.
find out if Big Technologies may be over or under priced by reviewing our comprehensive analysis which includes the following Fair Value Estimates, Risks and Warnings, Dividends, Insider Trading and Financial Health.
Check out the free analysis
Do you have any feedback about this article? Concerned about the content? Get in touch directly with us. Alternatively, send an email to the editorial team (at) simplywallst.com.
This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.