PLC 4ever
Related Articles
With its stock down 18% over the past three months, the Burberry Group (LON: BRBY) can easily be disregarded. However, if you look carefully, you might find that key financial indicators look pretty decent, which could mean the stock could potentially go up over the long term, as markets typically reward more resilient long-term fundamentals. In particular, we decided to study the Burberry Group‘s ROE in this article.
Return on Equity, or ROE, is an important factor to consider as a shareholder telling them how effectively their capital will be reinvested. In other words, it’s a profitability metric that measures the return on the capital provided by the company’s shareholders.
Check out our latest analysis for the Burberry Group
How do you calculate the return on equity?
the Formula for ROE is:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for the Burberry Group is:
24% = UK £ 376m £ 1.6bn (based on the last 12 months ended March 2021).
“Return” refers to a company’s earnings over the past year. One way to conceptualize this is that for every £ 1 of shareholder equity the company made a profit of £ 0.24.
What does ROE have to do with earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of these profits the company reinvests or “withholds” and how effectively this is done, we can then estimate the earnings growth potential of a company. Assuming all else is equal, companies that have both higher return on equity and higher earnings retention typically have a higher growth rate than companies that do not share the same characteristics.
Burberry Group’s earnings growth and 24% ROE
First off, the Burberry Group has a pretty high ROE, which is interesting. Even compared to the industry average of 24%, the company’s ROE is quite decent. As you might expect, the 8.3% decline in Burberry Group’s net income is somewhat surprising. So there could be some other aspects that could explain this. For example, the company pays out a large part of its profits as dividends or faces competitive pressures.
From the 8.3% decline reported by the industry over the same period, we conclude that the Burberry Group and its industry are similarly shrinking.
The basis for increasing the value of a company is largely linked to its earnings development. It is important for an investor to know if the market has factored in the company’s expected earnings growth (or decline). This then helps them determine whether the stock is placed for a bright or bleak future. What is BRBY worth today? The intrinsic value infographic in our free research report helps visualize whether BRBY is currently being mispriced by the market.
Is the Burberry Group reinvesting its profits efficiently?
Despite a normal 3-year median payout ratio of 49% (i.e., a retention rate of 51%), the fact that the Burberry Group’s earnings have shrunk is pretty puzzling. It looks like there could be a few other reasons to explain the shortcoming in this regard. For example, business could be in decline.
Additionally, the Burberry Group has paid dividends over a period of at least a decade, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of business growth. While studying the latest analyst consensus data, we found that the company is expected to continue to cash out about 55% of its earnings over the next three years. As a result, the company’s future ROE is unlikely to change significantly, as analysts are forecasting a ROE of 21%.
summary
Overall, it looks like the Burberry Group has some positives in its business. However, we are disappointed that despite a high ROE and high reinvestment rate, there is no earnings growth. We believe there could be some external factors that could negatively affect the business. However, given the latest analyst estimates, we determined that the company’s earnings growth rate is expected to see a huge improvement. To learn more about the company’s future earnings growth projections, take a look at this for free Report on analyst forecast for the company to learn more.
This article from Simply Wall St is of a general nature. We only provide comments based on historical data and analyst projections using an unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price. Simply Wall St has no position in the stocks mentioned.
Do you have any feedback on this article? Concerned about the content? Get in touch directly with us. Alternatively, send an email to the editorial team (at) simplywallst.com.
