Is Bunzl plc (LON:BNZL) stock’s recent performance guided by its attractive financial outlook?

Bunzl (LON:BNZL) has had a great run in the stock market, with its stock up a whopping 11% 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. In particular, we decided to examine Bunzl’s 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 terms of shareholder investments.

Check out our latest analysis for Bunzl

How is ROE calculated?

That Formula for ROE is:

Return on Equity = Net Income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for Bunzl is:

20% = UK£443m ÷ UK£2.2b (Based on trailing 12 months to December 2021).

The “return” is the profit of the last twelve months. This means that for every £1 worth of equity, the company makes £0.20 profit.

Why is ROE important for 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 reinvests, or “retains,” we are then able to assess a company’s future ability to generate profits. Assuming all else being equal, companies that exhibit both higher return on equity and higher earnings retention tend to be those that exhibit a higher growth rate than companies that do not share the same characteristics.

A head-to-head comparison of Bunzl’s earnings growth and 20% ROE

At first glance, Bunzl seems to have a decent ROE. And comparing it to the industry, we found that the average industry ROE is similar at 19%. This likely explains Bunzl’s modest 11% growth over the past five years, among other factors.

We then ran a comparison between Bunzl’s net income growth and the industry, which found the company’s growth to be similar to the average industry growth of 11% over the same period.

LSE:BNZL Past Earnings Growth May 9, 2022

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. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in future prospects for BNZL? You can find out in our latest Intrinsic Value infographic research report.

Does Bunzl use his profits efficiently?

Bunzl has a healthy combination of a moderate 3-year median payout ratio of 45% (or retention ratio of 55%) and respectable earnings growth, as we saw above, meaning the company has used these earnings efficiently.

Bunzl has also been paying dividends for at least ten years. This shows that the company has an obligation to share profits with its shareholders. Based on the latest analyst estimates, we have found that the company’s future payout ratio is expected to remain steady at 39% for the next three years. As a result, Bunzl’s ROE is also not expected to change significantly, which is what we inferred from the analyst estimate of 19% for future ROE.

Conclusion

Overall, we are quite happy with Bunzl’s 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. Are these analyst expectations based on broader expectations for the industry or on company fundamentals? Click here to go to our analyst’s forecast page for the company.

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.

About Nina Snider

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