Is Breville Group Limited's (ASX:BRG) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Breville Group (ASX:BRG) has had a great run on the share market with its stock up by a significant 28% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Breville Group's ROE in this article.

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.

See our latest analysis for Breville Group

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Breville Group is:

16% = AU$66m ÷ AU$426m (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.16 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

Breville Group's Earnings Growth And 16% ROE

At first glance, Breville Group seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 13%. Probably as a result of this, Breville Group was able to see a decent growth of 9.1% over the last five years.

Next, on comparing with the industry net income growth, we found that Breville Group's growth is quite high when compared to the industry average growth of 6.6% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Breville Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Breville Group Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 73% (or a retention ratio of 27%) for Breville Group suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Breville Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 68%. However, Breville Group's ROE is predicted to rise to 22% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we are quite pleased with Breville Group's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.

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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. 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.
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