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Finsbury Food Group (LON: FIF) stock is up 4.9% over the past week. Since stock prices tend to be aligned with a company’s financial performance over the long term, we decided to investigate whether the company’s decent financials played a role in the recent price move. In this article, we’ve chosen to focus on the Finsbury Food Group’s ROE.
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 shows the company’s success in turning shareholder investments into profits.
Check out our latest analysis for Finsbury Food Group
How is the ROE calculated?
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 Finsbury Food Group is:
12% = UK 14m £ 113m UKGB (based on 12 months ended June 2021).
The “return” is the amount earned after tax over the past twelve months. That means the company made a profit of £ 0.12 for every £ 1 worth of equity.
What does ROE have to do with earnings growth?
We have already established that ROE is an efficient profitable measure of a company’s future earnings. Based on how much of its profits the company will reinvest or “keep” we can then assess a company’s future ability to generate profits. Assuming everything else stays the same, the higher the rate of growth of a company compared to companies that do not necessarily have these characteristics, the higher the ROE and earnings retention.
Finsbury Food Group’s earnings growth and 12% ROE
For starters, the Finsbury Food Group’s ROE looks acceptable. In addition, the company’s ROE is equivalent to the industry average of 11%. As you’d expect, the 9.6% decline in net income reported by Finsbury Food Group comes as a bit of a surprise. We assume that other factors could play a role here that hinder the company’s growth. These include poor retained earnings or poor capital allocation.
As a next step, we compared the performance of Finsbury Food Group with that of the industry and were disappointed to find that while the company contracted profits, the industry rose 0.2% over the same period.
Earnings growth is an important metric to consider when evaluating a stock. The investor should try to figure out whether it is pricing in expected growth or decline in earnings, whatever the case. This helps him determine whether the future of the stock looks promising or ominous. Is Finsbury Food Group fairly valued compared to other companies? These 3 benchmarks can help you make a decision.
Is Finsbury Food Group using its profits efficiently?
Given the average 45% payout rate (or a 55% retention rate) for three years, which is pretty normal, Finsbury Food Group’s declining profits are pretty baffling, as one would expect decent growth if a company were at one Company captures a good part of its profits. So other factors could play a role here that could potentially stifle growth. For example, the business is facing some headwinds.
Additionally, Finsbury Food Group has been paying dividends for nine years, which is a sizable span of time, suggesting management must have realized that shareholders prefer constant dividends even though profits have declined. Existing analyst estimates suggest that the company’s future payout ratio is expected to drop to 35% over the next three years. Regardless of the expected decrease in the payout ratio, Finsbury Food Group’s future ROE is expected to decrease to 9.0%. We suspect there could likely be other factors that could be causing the anticipated decline in the company’s ROE.
summary
Overall, we think Finsbury Food Group has some positive qualities. However, given the high ROE and high earnings retention, we expect strong earnings growth for the company, but that’s not the case here. This suggests that there may be an external threat to the company that is holding back its growth. However, we have examined the latest analyst forecast and found that analysts expect a slight improvement in the company’s earnings growth. The company’s current shareholders could still have some breathing space. Are these analyst expectations based on broad industry expectations or company fundamentals? Click here to go to our analysts forecast page for the company.
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 shares 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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