Stock Analysis

Is BlueScope Steel Limited's (ASX:BSL) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

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ASX:BSL
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BlueScope Steel's (ASX:BSL) stock is up by a considerable 31% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on BlueScope Steel'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for BlueScope Steel

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for BlueScope Steel is:

1.8% = AU$128m ÷ AU$7.0b (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$0.02 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

BlueScope Steel's Earnings Growth And 1.8% ROE

As you can see, BlueScope Steel's ROE looks pretty weak. Not just that, even compared to the industry average of 13%, the company's ROE is entirely unremarkable. Although, we can see that BlueScope Steel saw a modest net income growth of 19% over the past five years. We believe that there might 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.

Next, on comparing with the industry net income growth, we found that BlueScope Steel's reported growth was lower than the industry growth of 32% in the same period, which is not something we like to see.

past-earnings-growth
ASX:BSL Past Earnings Growth January 7th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is BSL worth today? The intrinsic value infographic in our free research report helps visualize whether BSL is currently mispriced by the market.

Is BlueScope Steel Making Efficient Use Of Its Profits?

In BlueScope Steel's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 7.3% (or a retention ratio of 93%), which suggests that the company is investing most of its profits to grow its business.

Besides, BlueScope Steel has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 13% over the next three years. However, BlueScope Steel's future ROE is expected to rise to 9.2% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Conclusion

On the whole, we do feel that BlueScope Steel has some positive attributes. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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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