With 21.4% predicted earnings growth over the next year British American Tobacco plc (LSE:BATS) seems to be a well performing company. Are you considering investing? Then keep reading. I’m going to look at the latest data and analyse this growth stock in more detail. See our latest analysis for BATS
Can we expect BATS to keep growing?
Analysts covering BATS are expecting a 38.8% increase in earnings in the three year’s time. This means that earnings per share are to rise to £3.38 levels.
Revenue during the same period is expected to grow from £13.38 Billion to £22.32 Billion in 2020 and net income is predicted to grow from £4,316 M to £7,544 M in 2020, roughly growing 1.7x. Margins are expected to be extremely healthy during this time as well.
Basis for the growthBritish American Tobacco has grown its earnings faster than the Food and Beverage industry average but that itself is not a very big accomplishment seeing as the industry has been struggling in the past year.
BATS has been performing exceptionally based on an ROE of 71.7%, this is above the average for the industry of 40.22%. It’s also worth noting that such a high ROE is partially due to British American Tobacco having a low amount of equity on the balance sheet. This is expected to improve even further with the stock estimated to have an outstanding ROE of 55.1%.
Return on equity (ROE) is a measure of how much profit (net income) a company makes as a percentage of the shareholders equity. Equity is made up of funds from the original issuing of shares and any retained earnings from previous financial years. It varies considerably across sectors, for this reason it is important to asses a stocks ROE relative to its industry. Whilst it is true that the higher the ROE the better the company is performing, ROE does have a weakness. A stock with a disproportionate amount of debt can lead to a small equity base. Thus, a small amount of net income (the numerator) could still produce a high ROE off a modest equity base (the denominator). For this reason investors should always consider the debt situation in conjunction with ROE.
British American Tobacco is a fast growing company, but as Warren Buffett’s right-hand man Charlie Munger said, “No matter how wonderful a business is, it’s not worth an infinite price“. Is BATS overpriced? Or could it be considered an undervalued opportunity? I recommend you see our latest FREE analysis to find out!
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