Do Its Financials Have Any Role To Play In Driving Barry Callebaut AG's (VTX:BARN) Stock Up Recently?

editorial-team@simplywallst.com (Simply Wall St)

Fri, Dec 1, 2023, 12:31 AM 4 min read

Barry Callebaut (VTX:BARN) has had a great run on the share market with its stock up by a significant 6.0% over the last month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Barry Callebaut'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Barry Callebaut

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Barry Callebaut is:

15% = CHF443m ÷ CHF2.9b (Based on the trailing twelve months to August 2023).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CHF1 of shareholders' capital it has, the company made CHF0.15 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Barry Callebaut's Earnings Growth And 15% ROE

To begin with, Barry Callebaut seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 15%. Despite the moderate return on equity, Barry Callebaut has posted a net income growth of 2.0% over the past five years. A few likely reasons that could be keeping earnings growth low are - the company has a high payout ratio or the business has allocated capital poorly, for instance.

Next, on comparing with the industry net income growth, we found that Barry Callebaut's reported growth was lower than the industry growth of 5.3% over the last few years, which is not something we like to see.

past-earnings-growth — SWX:BARN Past Earnings Growth December 1st 2023

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is BARN fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Barry Callebaut Making Efficient Use Of Its Profits?

While Barry Callebaut has a decent three-year median payout ratio of 39% (or a retention ratio of 61%), it has seen very little growth in earnings. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Moreover, Barry Callebaut has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 37% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 16%.

Conclusion

In total, it does look like Barry Callebaut has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.