Is Burger Fuel Group Limited's (NZSE:BFG) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Burger Fuel Group (NZSE:BFG) has had a great run on the share market with its stock up by a significant 13% over the last 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. In this article, we decided to focus on Burger Fuel Group's ROE.

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

Check out our latest analysis for Burger Fuel Group

How Is ROE Calculated?

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 Burger Fuel Group is:

7.5% = NZ$929k ÷ NZ$12m (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. So, this means that for every NZ$1 of its shareholder's investments, the company generates a profit of NZ$0.07.

Why Is ROE Important For 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. 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.

A Side By Side comparison of Burger Fuel Group's Earnings Growth And 7.5% ROE

When you first look at it, Burger Fuel Group's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.5%. Having said that, Burger Fuel Group has shown a meagre net income growth of 2.7% over the past five years. Bear in mind, the company's ROE is not very high . Hence, this does provide some context to low earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Burger Fuel Group compares quite favourably to the industry average, which shows a decline of 5.4% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. 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 Burger Fuel Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Burger Fuel Group Making Efficient Use Of Its Profits?

Burger Fuel Group doesn't pay any dividend, meaning that potentially all of its profits are being reinvested in the business. However, there's only been very little earnings growth to show for it. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Summary

In total, it does look like Burger Fuel Group has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 2 risks we have identified for Burger Fuel Group visit our risks dashboard for free.

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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.