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Billington Holdings (LON: BILN) had a difficult week with a 10% loss. It seems that the market has completely ignored the positive aspects of the company’s fundamentals and has chosen to give more consideration to the negative aspects. Stock prices are usually determined by a company’s financial performance over the long term, so we decided to pay more attention to the company’s financial performance. We will be paying particular attention today to the Billington Holdings ROE.
Return on Equity, or ROE, is a test of how effectively a company is increasing its value and managing investors’ money. In simpler terms, it measures a company’s profitability in relation to equity.
Check out our latest analysis for Billington Holdings
How do you calculate the return on equity?
the Formula for return on equity is:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Billington Holdings is:
5.0% = UK £ 1.5m ÷ UK £ 30m (based on the last twelve months through June 2021).
The “return” is the profit for the past twelve months. That means the company made £ 1 0.05 in profit per equity.
Why is ROE important to 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 a company’s earnings growth potential. 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.
Billington Holdings earnings growth and 5.0% ROE
At first glance, Billington Holdings’ ROE doesn’t look that attractive. However, a closer study reveals that the company’s ROE is in line with the industry average of 5.3%. However, the rate of decline in net income for Billington Holdings over five years was 4.4%. Keep in mind that the company’s ROE is a little low to begin with. Therefore, the decline in earnings could also be due to this.
Additionally, we found that Billington Holdings’ performance, even when compared to the industry, which shrank its profits by 1.7% over the same period, is quite disappointing, as it suggests that the company’s profits are at a rate have shrunk faster than industry.
Earnings growth is an important metric to consider when evaluating a stock. Next, investors need to determine whether or not expected earnings growth is already included in the stock price. In this way, they have an idea of whether the stock is leading into clear blue water or expecting swampy water. Is Billington Holdings fairly valued compared to other companies? These 3 benchmarks can help you make a decision.
Is Billington Holdings Reinvesting Its Profits Efficiently?
Given the three-year average payout rate of 36% (or a retention rate of 64%) which is pretty normal, Billington Holdings’ earnings decline is pretty confusing as one would expect decent growth from an equity stake. a good part of his profit. So other factors could play a role here that could potentially stifle growth. For example, the business has seen quite a bit of headwind.
Additionally, Billington Holdings has been paying dividends for six years, which is a considerable length of time, suggesting management must have realized that shareholders prefer constant dividends even though profits have declined.
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Overall, we believe that the performance shown by Billington Holdings is open to many interpretations. While it may appear to be holding most of its profits, investors may not benefit from all of these reinvestments given the low ROE. The low earnings growth suggests our theory is correct. In conclusion, we would be proceeding with caution with this company and one way to do this would be to look at the risk profile of the business. To learn the 5 risks we’ve identified for Billington Holdings, visit our Risk Dashboard for Free.
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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.
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