Bisalloy Steel Group Limited (ASX:BIS) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

With its stock down 9.1% over the past three months, it is easy to disregard Bisalloy Steel Group (ASX:BIS). 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 Bisalloy Steel Group's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Bisalloy Steel Group

How Do You 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 Bisalloy Steel Group is:

16% = AU$6.8m ÷ AU$43m (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. That means that for every A$1 worth of shareholders' equity, the company generated A$0.16 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Bisalloy Steel Group's Earnings Growth And 16% ROE

At first glance, Bisalloy Steel 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, Bisalloy Steel Group was able to see an impressive net income growth of 24% over the last 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.

As a next step, we compared Bisalloy Steel Group's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 32% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. One 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 prospects. So, you may want to check if Bisalloy Steel Group is trading on a high P/E or a low P/E, relative to its industry.

Is Bisalloy Steel Group Efficiently Re-investing Its Profits?

Bisalloy Steel Group has a three-year median payout ratio of 44% (where it is retaining 56% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Bisalloy Steel Group is reinvesting its earnings efficiently.

Moreover, Bisalloy Steel Group is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend.

Conclusion

In total, we are pretty happy with Bisalloy Steel Group's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard would have the 4 risks we have identified for Bisalloy Steel Group.

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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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