Breville Group Limited's (ASX:BRG) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Breville Group (ASX:BRG) has had a rough three months with its share price down 15%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Breville Group'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Breville Group

How Do You 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 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. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.16.

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. 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. And on comparing with the industry, we found that the the average industry ROE is similar at 17%. This certainly adds some context to Breville Group's moderate 9.1% net income growth seen over the past five years.

When you consider the fact that the industry earnings have shrunk at a rate of 1.4% in the same period, the company's net income growth is pretty remarkable.

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. 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 Efficiently Re-investing 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.

Additionally, Breville Group has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 67% of its profits over the next three years. Still, forecasts suggest that Breville Group's future ROE will rise to 22% even though the the company's payout ratio is not expected to change by much.

Summary

In total, we are pretty happy with Breville Group's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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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