Bowler Metcalf's (JSE:BCF) stock is up by a considerable 18% over the past month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study Bowler Metcalf's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Bowler Metcalf
How Do You Calculate Return On Equity?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Bowler Metcalf is:
9.4% = R69m ÷ R728m (Based on the trailing twelve months to June 2023).
The 'return' is the yearly profit. One way to conceptualize this is that for each ZAR1 of shareholders' capital it has, the company made ZAR0.09 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Bowler Metcalf's Earnings Growth And 9.4% ROE
It is quite clear that Bowler Metcalf's ROE is rather low. Even compared to the average industry ROE of 17%, the company's ROE is quite dismal. Hence, the flat earnings seen by Bowler Metcalf over the past five years could probably be the result of it having a lower ROE.
Next, on comparing with the industry net income growth, we found that Bowler Metcalf's reported growth was lower than the industry growth of 20% over the last few years, which is not something we like to see.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for BCF? You can find out in our latest intrinsic value infographic research report
Is Bowler Metcalf Efficiently Re-investing Its Profits?
Despite having a normal three-year median payout ratio of 41% (implying that the company keeps 59% of its income) over the last three years, Bowler Metcalf has seen a negligible amount of growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.