Stock Analysis

B&C Speakers S.p.A.'s (BIT:BEC) Stock Is Going Strong: Have Financials A Role To Play?

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BIT:BEC
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Most readers would already be aware that B&C Speakers' (BIT:BEC) stock increased significantly by 12% over the past week. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study B&C Speakers' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for B&C Speakers

How To 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 B&C Speakers is:

22% = €6.6m ÷ €30m (Based on the trailing twelve months to March 2022).

The 'return' is the yearly profit. That means that for every €1 worth of shareholders' equity, the company generated €0.22 in profit.

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of B&C Speakers' Earnings Growth And 22% ROE

At first glance, B&C Speakers seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 13%. Needless to say, we are quite surprised to see that B&C Speakers' net income shrunk at a rate of 12% over the past five years. We reckon that there could be some other factors at play here that are preventing the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

So, as a next step, we compared B&C Speakers' performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 14% in the same period.

past-earnings-growth
BIT:BEC Past Earnings Growth September 7th 2022

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 B&C Speakers fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is B&C Speakers Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 70% (implying that 30% of the profits are retained), most of B&C Speakers' profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. Our risks dashboard should have the 2 risks we have identified for B&C Speakers.

Moreover, B&C Speakers has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

On the whole, we do feel that B&C Speakers has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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About BIT:BEC

B&C Speakers

B&C Speakers S.p.A. engages in production and marketing of professional loudspeakers under the B&C brand in Italy and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation1
Future Growth4
Past Performance5
Financial Health3
Dividends3

Read more about these checks in the individual report sections or in our analysis model.

Solid track record with reasonable growth potential.