Big River Industries Limited's (ASX:BRI) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Most readers would already be aware that Big River Industries' (ASX:BRI) stock increased significantly by 9.7% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Big River Industries' ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View 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$4.4m ÷ AU$72m (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.06 in profit.

What Has ROE Got To Do With 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 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.

Big River Industries' Earnings Growth And 6.2% ROE

At first glance, Big River Industries' ROE doesn't look very promising. However, its ROE is similar to the industry average of 7.6%, so we won't completely dismiss the company. On the other hand, Big River Industries reported a moderate 8.1% net income growth over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this 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.

We then performed a comparison between Big River Industries' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 8.7% in the same period.

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 Big River Industries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Big River Industries Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 61% (or a retention ratio of 39%) 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 60%. Regardless, the future ROE for Big River Industries is predicted to rise to 12% despite there being not much change expected in its payout ratio.

Summary

Overall, we feel that Big River Industries certainly does have some positive factors to consider. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. 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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