Are Budweiser Brewing Company APAC Limited's (HKG:1876) Mixed Financials Driving The Negative Sentiment?

Budweiser Brewing Company APAC (HKG:1876) has had a rough three months with its share price down 18%. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Particularly, we will be paying attention to Budweiser Brewing Company APAC's ROE today.

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.

See our latest analysis for Budweiser Brewing Company APAC

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Budweiser Brewing Company APAC is:

8.6% = US$896m ÷ US$10b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.09 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 Budweiser Brewing Company APAC's Earnings Growth And 8.6% ROE

When you first look at it, Budweiser Brewing Company APAC's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 15%, the company's ROE leaves us feeling even less enthusiastic. Accordingly, Budweiser Brewing Company APAC's low net income growth of 2.6% over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Budweiser Brewing Company APAC's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 23% in the same 5-year period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 1876? You can find out in our latest intrinsic value infographic research report.

Is Budweiser Brewing Company APAC Making Efficient Use Of Its Profits?

Despite having a normal three-year median payout ratio of 50% (or a retention ratio of 50% over the past three years, Budweiser Brewing Company APAC has seen very little growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Budweiser Brewing Company APAC has paid dividends over a period of four years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 55%. Still, forecasts suggest that Budweiser Brewing Company APAC's future ROE will rise to 11% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, we're a bit ambivalent about Budweiser Brewing Company APAC's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.