Blackmores (ASX: BKL) has had about three months with a share price down 15%. However, stock prices are generally driven by a company’s long-term financial data, which in this case seems quite respectable. In particular, we decided to study Blackmores’ ROE in this article.
Return on equity or ROE is a key measure used to evaluate the effectiveness of the management of the company by the company’s capital. In other words, it reveals the company’s success in turning shareholder investments into profits.
Check out our latest analysis for Blackmores
How do you calculate the return on equity?
ROE can be calculated using the formula:
Return on Equity = Net profit (from continuing operations) ÷ Shareholders’ equity
So based on the formula above, the ROE for Blackmores is:
17% = AU $ 38m ÷ AU $ 217m (Based on twelve month trailing in December 2019).
The “return” is the income that the company has earned in the past year. So this means that for every A $ 1 of its shareholder investments, the company generates a profit of A $ 0.17.
What is the relationship between ROE and earnings growth?
We have already established that ROE acts as an efficient indicator that generates profits for a company’s future earnings. Depending on how many of these profits the company reinvests or “holds” and with its effectiveness, we are therefore able to evaluate the potential growth of a company’s profits. Assuming that everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that do not necessarily have these characteristics.
Blackmores and ROE earnings growth of 17%
For starters, Blackmores’ ROE seems acceptable. In addition, the company’s ROE is similar to the industry average of 15%. Under the circumstances, we can’t help but wonder why the Blackmores have seen little or no growth in the past five years. Based on this, we believe there may be other reasons that have not been discussed so far in this article that could hinder the company’s growth. For example, the company pays a large portion of its earnings as dividends or faces competitive pressure.
We then compared Blackmores’ net income growth with the industry and found that the industry average growth rate was 3.1% over the same period.
Earnings growth is an important metric to consider when evaluating a security. What investors need to determine next is whether expected profit growth, or lack thereof, is already integrated into the share price. In this way, they will have an idea if the stock is headed in crystal clear waters or if marshy waters await. Has the market assessed BKL’s future prospects? You can find out in our latest intrinsic value infographic research report.
Is Blackmores Making Efficient Use Of Its Profits?
Blackmores does not pay any dividends, which means that the company is keeping all of its profits, which makes us wonder why it is retaining its earnings if it cannot use them to grow its business. There seem to be other reasons to explain the lack in this regard. For example, the business may be in decline.
Overall, we believe Blackmores certainly has some positive factors to consider. However, the low earnings growth is somewhat worrying, mainly because the company has a high rate of return and is reinvesting a large part of its profits. Apparently, there may be other factors, not necessarily in control of the business, that impede growth. Having said that, looking at the estimates of current analysts, we found that the company’s earnings growth rate should register a huge improvement. To learn more about the company’s future earnings growth forecasts, take a look at this free report on the analysts’ forecasts for the company to learn more.
If you notice an error that requires correction, contact the editor at [email protected] This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or financial situation. Simply Wall St has no position in the mentioned actions.
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