Do Its Financials Have Any Role To Play In Driving Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt.'s (BUSE:BIF) Stock Up Recently?

Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt's (BUSE:BIF) stock is up by a considerable 20% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt

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 Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt is:

18% = Ft10b ÷ Ft56b (Based on the trailing twelve months to December 2022).

The 'return' is the yearly profit. That means that for every HUF1 worth of shareholders' equity, the company generated HUF0.18 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt's Earnings Growth And 18% ROE

At first glance, Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt seems to have a decent ROE. On comparing with the average industry ROE of 13% the company's ROE looks pretty remarkable. Needless to say, we are quite surprised to see that Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt's net income shrunk at a rate of 8.1% over the past five years. Therefore, there might be some other aspects that could explain this. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

That being said, we compared Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 9.8% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. 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 BIF fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt Using Its Retained Earnings Effectively?

Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 64% (or a retention ratio of 36%). The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. Our risks dashboard should have the 5 risks we have identified for Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt.

In addition, Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt has been paying dividends over a period of five years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Conclusion

In total, it does look like Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt has some positive aspects to its business. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.