Is Biofarm S.A.'s (BVB:BIO) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

By
Simply Wall St
Published
March 17, 2021
BVB:BIO
Source: Shutterstock

Biofarm's (BVB:BIO) stock is up by a considerable 40% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Biofarm'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Biofarm

How Is ROE Calculated?

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 Biofarm is:

19% = RON55m ÷ RON292m (Based on the trailing twelve months to December 2020).

The 'return' is the yearly profit. That means that for every RON1 worth of shareholders' equity, the company generated RON0.19 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.

Biofarm's Earnings Growth And 19% ROE

To begin with, Biofarm seems to have a respectable ROE. On comparing with the average industry ROE of 9.9% the company's ROE looks pretty remarkable. This probably laid the ground for Biofarm's moderate 16% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Biofarm's growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.

past-earnings-growth
BVB:BIO Past Earnings Growth March 18th 2021

Earnings growth is a huge factor in stock valuation. 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 Biofarm fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Biofarm Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 44% (implying that the company retains 56% of its profits), it seems that Biofarm is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, Biofarm has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

In total, we are pretty happy with Biofarm's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 2 risks we have identified for Biofarm visit our risks dashboard for free.

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