Is Balfour Beatty plc's (LON:BBY) Recent Performance Tethered To Its Attractive Financial Prospects?

Balfour Beatty's (LON:BBY) stock is up by 8.8% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Particularly, we will be paying attention to Balfour Beatty's 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Balfour Beatty

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 Balfour Beatty is:

19% = UK£227m ÷ UK£1.2b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.19 in profit.

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. 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 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 Balfour Beatty's Earnings Growth And 19% ROE

To start with, Balfour Beatty's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 15%. Probably as a result of this, Balfour Beatty was able to see an impressive net income growth of 24% over the last five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then performed a comparison between Balfour Beatty's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 21% in the same 5-year period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Balfour Beatty's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Balfour Beatty Efficiently Re-investing Its Profits?

Balfour Beatty's three-year median payout ratio is a pretty moderate 30%, meaning the company retains 70% of its income. So it seems that Balfour Beatty 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, Balfour Beatty 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 31%. Still, forecasts suggest that Balfour Beatty's future ROE will drop to 15% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, we feel that Balfour Beatty's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.