BigBen Interactive (EPA:BIG) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

BigBen Interactive (EPA:BIG) has had a rough three months with its share price down 28%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on BigBen Interactive’s ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for BigBen Interactive

How Is ROE Calculated?

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 BigBen Interactive is:

11% = €20m ÷ €170m (Based on the trailing twelve months to September 2019).

The ‘return’ is the amount earned after tax over the last twelve months. That means that for every €1 worth of shareholders’ equity, the company generated €0.11 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.

A Side By Side comparison of BigBen Interactive’s Earnings Growth And 11% ROE

To start with, BigBen Interactive’s ROE looks acceptable. Further, the company’s ROE is similar to the industry average of 11%. This certainly adds some context to BigBen Interactive’s exceptional 55% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company’s earnings growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that BigBen Interactive’s growth is quite high when compared to the industry average growth of 20% in the same period, which is great to see.

ENXTPA:BIG Past Earnings Growth May 15th 2020
ENXTPA:BIG Past Earnings Growth May 15th 2020

Earnings growth is an important metric to consider when valuing a stock. 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 BigBen Interactive fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is BigBen Interactive Making Efficient Use Of Its Profits?

BigBen Interactive’s three-year median payout ratio to shareholders is 20%, which is quite low. This implies that the company is retaining 80% of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Besides, BigBen Interactive has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to rise to 25% over the next three years. Therefore, the expected rise in the payout ratio explains why the company’s ROE is expected to decline to 8.8% over the same period.

Conclusion

Overall, we are quite pleased with BigBen Interactive’s performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company’s earnings growth is expected to slow down. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.