Is Beacon Lighting Group Limited's (ASX:BLX) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Beacon Lighting Group's (ASX:BLX) stock is up by a considerable 39% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Beacon Lighting Group's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Beacon Lighting Group

How Do You Calculate Return On Equity?

Return on equity 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 Beacon Lighting Group is:

28% = AU$32m ÷ AU$114m (Based on the trailing twelve months to December 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.28.

What Has ROE Got To Do With 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. 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.

Beacon Lighting Group's Earnings Growth And 28% ROE

To begin with, Beacon Lighting Group has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 18% which is quite remarkable. Probably as a result of this, Beacon Lighting Group was able to see a decent net income growth of 6.8% over the last five years.

We then compared Beacon Lighting Group's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.7% in the same period, which is a bit concerning.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is BLX fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Beacon Lighting Group Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 55% (or a retention ratio of 45%) for Beacon Lighting Group suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Beacon Lighting Group has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 52%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 24%.

Summary

On the whole, we do feel that Beacon Lighting Group has some positive attributes. Its earnings growth is decent, and the high ROE does contribute to that growth. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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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