Is The Bombay Burmah Trading Corporation, Limited's (NSE:BBTC) Latest Stock Performance Being Led By Its Strong Fundamentals?

Bombay Burmah Trading Corporation's (NSE:BBTC) stock up by 4.9% 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. In this article, we decided to focus on Bombay Burmah Trading Corporation's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Bombay Burmah Trading Corporation

How Is ROE Calculated?

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 Bombay Burmah Trading Corporation is:

21% = ₹14b ÷ ₹67b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.21 in profit.

What Is The Relationship Between ROE And 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.

Bombay Burmah Trading Corporation's Earnings Growth And 21% ROE

At first glance, Bombay Burmah Trading Corporation seems to have a decent ROE. Especially when compared to the industry average of 10% the company's ROE looks pretty impressive. This certainly adds some context to Bombay Burmah Trading Corporation's decent 15% net income growth seen over the past five years.

We then performed a comparison between Bombay Burmah Trading Corporation's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 18% in the same period.

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. 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 Bombay Burmah Trading Corporation's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Bombay Burmah Trading Corporation Using Its Retained Earnings Effectively?

Bombay Burmah Trading Corporation has a low three-year median payout ratio of 1.4%, meaning that the company retains the remaining 99% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Moreover, Bombay Burmah Trading Corporation is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

On the whole, we feel that Bombay Burmah Trading Corporation's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 2 risks we have identified for Bombay Burmah Trading Corporation 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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