Stock Analysis

Is Weakness In Bastei Lübbe AG (ETR:BST) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

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XTRA:BST
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It is hard to get excited after looking at Bastei Lübbe's (ETR:BST) recent performance, when its stock has declined 14% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Bastei Lübbe'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Bastei Lübbe

How To Calculate Return On Equity?

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 Bastei Lübbe is:

11% = €5.6m ÷ €54m (Based on the trailing twelve months to December 2022).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.11 in profit.

What Is The Relationship Between ROE And 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. 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.

Bastei Lübbe's Earnings Growth And 11% ROE

To begin with, Bastei Lübbe seems to have a respectable ROE. Be that as it may, the company's ROE is still quite lower than the industry average of 15%. Still, we can see that Bastei Lübbe has seen a remarkable net income growth of 67% over the past five years. Therefore, there could be other causes behind this growth. Such as - high earnings retention or an efficient management in place. Bear in mind, the company does have a respectable ROE. It is just that the industry ROE is higher. So this certainly also provides some context to the high earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that Bastei Lübbe's growth is quite high when compared to the industry average growth of 7.0% in the same period, which is great to see.

past-earnings-growth
XTRA:BST Past Earnings Growth June 1st 2023

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Bastei Lübbe fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Bastei Lübbe Making Efficient Use Of Its Profits?

Bastei Lübbe's three-year median payout ratio is a pretty moderate 47%, meaning the company retains 53% of its income. So it seems that Bastei Lübbe is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Additionally, Bastei Lübbe has paid dividends over a period of nine 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 is expected to keep paying out approximately 49% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 10%.

Conclusion

In total, we are pretty happy with Bastei Lübbe's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.

Valuation is complex, but we're helping make it simple.

Find out whether Bastei Lübbe is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.