Are Robust Financials Driving The Recent Rally In Brunello Cucinelli S.p.A.'s (BIT:BC) Stock?

Brunello Cucinelli (BIT:BC) has had a great run on the share market with its stock up by a significant 13% over the last 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 Brunello Cucinelli's ROE in this article.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Brunello Cucinelli

How Is ROE Calculated?

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 Brunello Cucinelli is:

27% = €123m ÷ €449m (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.27 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. 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.

Brunello Cucinelli's Earnings Growth And 27% ROE

Firstly, we acknowledge that Brunello Cucinelli has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 9.7% which is quite remarkable. As a result, Brunello Cucinelli's exceptional 36% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing with the industry net income growth, we found that Brunello Cucinelli's growth is quite high when compared to the industry average growth of 23% in the same period, which is great to see.

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). Doing so will help them establish if the stock's future looks promising or ominous. Is Brunello Cucinelli fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Brunello Cucinelli Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 50% (implying that it keeps only 50% of profits) for Brunello Cucinelli suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Moreover, Brunello Cucinelli 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 51%. Accordingly, forecasts suggest that Brunello Cucinelli's future ROE will be 25% which is again, similar to the current ROE.

Summary

On the whole, we feel that Brunello Cucinelli's performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.