Boston Pizza Royalties Income Fund's (TSE:BPF.UN) Stock's Been Going Strong: Could Weak Financials Mean The Market Will Correct Its Share Price?

By
Simply Wall St
Published
April 15, 2021
TSX:BPF.UN
Source: Shutterstock

Boston Pizza Royalties Income Fund (TSE:BPF.UN) has had a great run on the share market with its stock up by a significant 24% over the last three months. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Particularly, we will be paying attention to Boston Pizza Royalties Income Fund's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Boston Pizza Royalties Income Fund

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 Boston Pizza Royalties Income Fund is:

3.7% = CA$9.6m ÷ CA$257m (Based on the trailing twelve months to December 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.04.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of Boston Pizza Royalties Income Fund's Earnings Growth And 3.7% ROE

At first glance, Boston Pizza Royalties Income Fund's ROE doesn't look very promising. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 9.4%. Therefore, it might not be wrong to say that the five year net income decline of 30% seen by Boston Pizza Royalties Income Fund was probably the result of it having a lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

However, when we compared Boston Pizza Royalties Income Fund's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 3.2% in the same period. This is quite worrisome.

past-earnings-growth
TSX:BPF.UN Past Earnings Growth April 16th 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. This then helps them determine if the stock is placed for a bright or bleak future. Is Boston Pizza Royalties Income Fund fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Boston Pizza Royalties Income Fund Efficiently Re-investing Its Profits?

Boston Pizza Royalties Income Fund's high three-year median payout ratio of 128% suggests that the company is depleting its resources to keep up its dividend payments, and this shows in its shrinking earnings. Its usually very hard to sustain dividend payments that are higher than reported profits. Our risks dashboard should have the 4 risks we have identified for Boston Pizza Royalties Income Fund.

Moreover, Boston Pizza Royalties Income Fund has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

On the whole, Boston Pizza Royalties Income Fund's performance is quite a big let-down. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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