Braime Group PLC's (LON:BMT) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Most readers would already be aware that Braime Group's (LON:BMT) stock increased significantly by 37% 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. Specifically, we decided to study Braime Group's ROE in this article.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Braime Group

How Do You 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 Braime Group is:

5.7% = UK£853k ÷ UK£15m (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.06 in profit.

Why Is ROE Important For 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.

A Side By Side comparison of Braime Group's Earnings Growth And 5.7% ROE

At first glance, Braime Group's ROE doesn't look very promising. Next, when compared to the average industry ROE of 17%, the company's ROE leaves us feeling even less enthusiastic. Although, we can see that Braime Group saw a modest net income growth of 5.7% over the past five years. So, the growth in the company's earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Braime 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 9.9% in the same period, which is a bit concerning.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Braime Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Braime Group Making Efficient Use Of Its Profits?

Braime Group's three-year median payout ratio to shareholders is 8.5% (implying that it retains 91% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Besides, Braime Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we feel that Braime Group certainly does have some positive factors to consider. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 3 risks we have identified for Braime Group by visiting our risks dashboard for free on our platform here.

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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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