The stock of Bell Food Group AG (VTX: BELL) recently showed weakness, but the financial outlook looks correct: is the market wrong?
It’s hard to get excited after looking at the recent performance of Bell Food Group (VTX: BELL), as its stock has fallen 4.7% in the past week. However, the fundamentals of the company look pretty decent, and long-term financial data is generally aligned with future movements in market prices. In particular, we will pay particular attention to the ROE of Bell Food Group today.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest analysis for Bell Food Group
How is the ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of Bell Food Group is:
9.6% = CHF 134 million ÷ CHF 1.4 billion (based on the last twelve months up to June 2021).
The “return” is the income the business has earned over the past year. This means that for every CHF 1 held by shareholders, the company generated CHF 0.10 in profits.
What does ROE have to do with profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on how much of those profits the company reinvests or “withholds” and its efficiency, we are then able to assess a company’s profit growth potential. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of Bell Food Group’s 9.6% profit growth and ROE
For starters, Bell Food Group’s ROE seems acceptable. Even so, compared to the industry average ROE of 14%, we’re not very excited. In addition, Bell Food Group’s 0.05% net profit growth over five years is more or less stable. Remember, the business has a decent ROE to start with, just that it’s below the industry average. As a result, other aspects could be behind the flat earnings growth. For example, the company may have a high payout ratio or the company has allocated capital, for example.
Then, comparing with the industry’s net income growth, we found that Bell Food Group’s reported growth was lower than the industry’s growth of 2.0% over the same period, which we do not like to see.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps him determine whether the stock is set for a bright or dark future. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if the Bell Food Group is trading high P / E or low P / E, relative to its industry.
Is the Bell Food Group using its retained earnings efficiently?
Despite a normal three-year median payout ratio of 37% (implying that the company keeps 63% of its revenue) over the past three years, Bell Food Group has seen negligible profit growth, as we have seen. seen above. So there could be another explanation for this. For example, the business of the company can deteriorate.
In addition, the Bell Food Group has paid dividends over a period of at least ten years, which suggests that sustaining dividend payments is much more important to management, even if it comes at the expense of the growth of the company. ‘business. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 32%. As a result, forecasts suggest that the future ROE of Bell Food Group will be 8.5%, which is again similar to the current ROE.
All in all, it seems that Bell Food Group has positive aspects for its business. Still, the weak earnings growth is a bit of a concern, especially since the company has a respectable rate of return and is reinvesting a huge chunk of its earnings. At first glance, there could be other factors, which do not necessarily control the business, which are preventing growth. That said, looking at current analysts’ estimates, we found that the company’s earnings are expected to accelerate. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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