Should Weakness in Restaurant Brands New Zealand Limited's (NZSE:RBD) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

With its stock down 35% over the past three months, it is easy to disregard Restaurant Brands New Zealand (NZSE:RBD). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Restaurant Brands New Zealand's 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Restaurant Brands New Zealand

How Do You Calculate Return On Equity?

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 Restaurant Brands New Zealand is:

11% = NZ$32m ÷ NZ$293m (Based on the trailing twelve months to December 2022).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each NZ$1 of shareholders' capital it has, the company made NZ$0.11 in profit.

What Has ROE Got To Do With 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. 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.

Restaurant Brands New Zealand's Earnings Growth And 11% ROE

To start with, Restaurant Brands New Zealand's ROE looks acceptable. On comparing with the average industry ROE of 7.4% the company's ROE looks pretty remarkable. Yet, Restaurant Brands New Zealand has posted measly growth of 2.8% over the past five years. This is interesting as the high returns should mean that the company has the ability to generate high growth but for some reason, it hasn't been able to do so. Such a scenario is likely to take place when a company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Restaurant Brands New Zealand compares quite favourably to the industry average, which shows a decline of 3.0% over the last few years.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is RBD worth today? The intrinsic value infographic in our free research report helps visualize whether RBD is currently mispriced by the market.

Is Restaurant Brands New Zealand Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 94% (or a retention ratio of 5.5%), most of Restaurant Brands New Zealand's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

In addition, Restaurant Brands New Zealand has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 15% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.

Conclusion

On the whole, we do feel that Restaurant Brands New Zealand has some positive attributes. Specifically, its high ROE which likely led to the growth in earnings. Bear in mind, the company reinvests little to none of its profits, which means that investors aren't necessarily reaping the full benefits of the high rate of return. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.