Is Burberry Group plc's (LON:BRBY) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

By
Simply Wall St
Published
February 12, 2022
LSE:BRBY
Source: Shutterstock

Most readers would already be aware that Burberry Group's (LON:BRBY) stock increased significantly by 13% over the past month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Burberry Group'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Burberry Group

How To Calculate Return On Equity?

ROE 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 Burberry Group is:

31% = UK£473m ÷ UK£1.5b (Based on the trailing twelve months to September 2021).

The 'return' is the amount earned after tax over the last twelve months. That means that for every £1 worth of shareholders' equity, the company generated £0.31 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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 Burberry Group's Earnings Growth And 31% ROE

Firstly, we acknowledge that Burberry Group has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 24% also doesn't go unnoticed by us. Despite this, Burberry Group's five year net income growth was quite flat over the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital

As a next step, we compared Burberry Group's performance with the industry and discovered the industry has shrunk at a rate of 1.7% in the same period meaning that the company has been shrinking its earnings at a rate lower than the industry. While this is not particularly good, its not particularly bad either.

past-earnings-growth
LSE:BRBY Past Earnings Growth February 12th 2022

Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for BRBY? You can find out in our latest intrinsic value infographic research report.

Is Burberry Group Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 46% (meaning the company retains54% of profits) in the last three-year period, Burberry Group's earnings growth was more or les flat. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Burberry Group has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 55%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 25%.

Summary

Overall, we feel that Burberry Group certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. 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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