Big River Industries Limited's (ASX:BRI) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Big River Industries (ASX:BRI) has had a great run on the share market with its stock up by a significant 15% over the last three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Big River Industries' 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 Big River Industries

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 Big River Industries is:

6.2% = AU$4.3m ÷ AU$70m (Based on the trailing twelve months to December 2019).

The 'return' is the income the business earned over the last year. That means that for every A$1 worth of shareholders' equity, the company generated A$0.06 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Big River Industries' Earnings Growth And 6.2% ROE

On the face of it, Big River Industries' ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.3%. Even so, Big River Industries has shown a fairly decent growth in its net income which grew at a rate of 5.8%. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Big River Industries' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 12% in the same period.

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. 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 Big River Industries is trading on a high P/E or a low P/E, relative to its industry.

Is Big River Industries Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 68% (or a retention ratio of 32%) for Big River Industries suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Big River Industries is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.

Conclusion

On the whole, we feel that the performance shown by Big River Industries can be open to many interpretations. While no doubt its earnings growth is pretty respectable, the low profit retention could mean that the company's earnings growth could have been higher, had it been paying reinvesting a higher portion of its profits. An improvement in its ROE could also help future earnings growth. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Big River Industries and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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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