The Bombay Burmah Trading Corporation, Limited's (NSE:BBTC) Stock Is Going Strong: Is the Market Following Fundamentals?

Bombay Burmah Trading Corporation's (NSE:BBTC) stock is up by a considerable 80% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Bombay Burmah Trading Corporation's ROE in this article.

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. 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 To 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 Bombay Burmah Trading Corporation is:

21% = ₹15b ÷ ₹73b (Based on the trailing twelve months to June 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.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

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

To begin with, Bombay Burmah Trading Corporation seems to have a respectable ROE. Especially when compared to the industry average of 9.6% the company's ROE looks pretty impressive. This certainly adds some context to Bombay Burmah Trading Corporation's decent 19% net income growth seen over the past five years.

Next, on comparing Bombay Burmah Trading Corporation's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 17% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Bombay Burmah Trading Corporation fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Bombay Burmah Trading Corporation Making Efficient Use Of Its Profits?

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.

Additionally, Bombay Burmah Trading Corporation 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.

Summary

In total, we are pretty happy with Bombay Burmah Trading Corporation's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 2 risks we have identified for Bombay Burmah Trading Corporation visit our risks dashboard for free.

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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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