Are Premium Brands Holdings Corporation's (TSE:PBH) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

Premium Brands Holdings (TSE:PBH) has had a rough three months with its share price down 15%. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Particularly, we will be paying attention to Premium Brands Holdings' ROE today.

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.

View our latest analysis for Premium Brands Holdings

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Premium Brands Holdings is:

7.5% = CA$133m ÷ CA$1.8b (Based on the trailing twelve months to December 2021).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.07 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. 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. 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.

A Side By Side comparison of Premium Brands Holdings' Earnings Growth And 7.5% ROE

On the face of it, Premium Brands Holdings' ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 8.3%, we may spare it some thought. On the other hand, Premium Brands Holdings reported a moderate 6.7% net income growth over the past five years. 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. 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 Premium Brands Holdings' growth is quite high when compared to the industry average growth of 2.7% in the same period, which is great to see.

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 Premium Brands Holdings is trading on a high P/E or a low P/E, relative to its industry.

Is Premium Brands Holdings Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 90% (or a retention ratio of 9.7%) for Premium Brands Holdings suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Premium Brands Holdings has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 43% over the next three years. As a result, the expected drop in Premium Brands Holdings' payout ratio explains the anticipated rise in the company's future ROE to 15%, over the same period.

Conclusion

In total, we're a bit ambivalent about Premium Brands Holdings' performance. Although the company has shown a pretty impressive growth in earnings, yet the low ROE and the low rate of reinvestment makes us skeptical about the continuity of that growth, especially when or if the business comes to face any threats. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.